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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2021

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

Commission File Number: 001-39059

 

 

 

AVITA MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

85-1021707

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

28159 Avenue Stanford

Suite 220

Valencia, CA 91355

(Address of principal executive offices and Zip Code)

Registrant’s telephone number, including area code: (661) 367-9170

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol 

 

Name of each exchange

on which registered 

Common Stock, par value $0.0001 per share

 

RCEL

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has selected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant was approximately $396,652,975 on December 31, 2020, using the closing price on that day of $18.58.

The number of shares of the registrant’s $0.0001 par value common stock outstanding as of August 18, 2021 was 24,895,864.

 

 

 


Table of Contents

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

 

FORWARD LOOKING STATEMENTS

1

 

 

 

PART 1

 

2

 

 

 

Item 1.

Business

2

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

29

Item 2.

Properties

29

Item 3.

Legal Proceedings

29

Item 4.

Mine Safety Disclosures

29

 

 

 

PART II

 

30

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

30

Item 6.

Selected Financial Data

31

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 8.

Financial Statements and Supplementary Data

40

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

40

Item 9A.

Controls and Procedures

40

Item 9B.

Other Information

41

 

 

 

PART III

 

42

Item 10.

Directors, Executive Officers and Corporate Governance

42

Item 11.

Executive Compensation

48

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

56

Item 13.

Certain Relationships and Related Party Transactions, and Director Independence

61

Item 14.

Principal Accounting Fees and Services

62

 

 

 

PART IV

 

63

Item 15.

Exhibits, Financial Statement and Schedules

63

Item 16.

Form 10-K Summary

64

 

 

SIGNATURES

65

 

 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Annual Report”) and our other public filings contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. Forward-looking statements can sometimes, but not always, be identified by words such as “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,” “may,” “will,” “would,” “potential” and similar expressions to future periods. Forward-looking statements are not based on historical facts but rather represent current expectations and assumptions. Forward-looking statements include statements we make about matters such as: future revenues; solvency; future industry market conditions; future changes in our capacity and operations; future operating and overhead costs; intellectual property; regulatory and related approvals; the conduct or outcome of pre-clinical or clinical (human) studies; operational and management restructuring activities (including implementation of methodologies and changes in the board of directors); future employment and contributions of personnel; effects on the global economy of the COVID-19 virus; tax and interest rates; productivity, business process, rationalization, investment, acquisition and acquisition integrations, consulting, operational, tax, financial and capital projects and initiatives; changes in the legal or regulatory environment; and future working capital, costs, revenues, business opportunities, cash flows, margins, earnings and growth.

Forward-looking statements relate to the future and are subject to many risks, assumptions and uncertainties, including those risks set forth in this Annual Report in Part I, Item IA Risk Factors and elsewhere. Although we believe the expectations reflected in the forward-looking statements are reasonable, actual results, developments and business decisions could differ materially from those contemplated by such forward-looking statements. The environment in which we operate is highly competitive, highly regulated and rapidly changing and it is not possible for our management to predict all risks, as new risks emerge from time to time.

All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future developments or otherwise, except as may be required by law.

Currency

In this Annual Report, all references to “dollars” or “$” are to the currency of the United States.

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PART I

Item 1. BUSINESS

GENERAL

AVITA Medical, Inc. (“AVITA” or the “Company”, and its subsidiaries, including AVITA Medical Pty Limited (“AVITA Medical”), the former parent company, (collectively, “AVITA Group” or “we”, “us”)) is a regenerative medicine company that is developing and commercializing a technology platform that enables point-of-care autologous skin restoration for multiple unmet needs. Our patented and proprietary platform technology provides innovative treatment solutions derived from the regenerative properties of a patient’s own skin. Our RECELL® Autologous Cell Harvesting System (“RECELL System” or “RECELL”) enables clinicians to prepare Spray-On Skin Cells, an autologous skin cell suspension that is sprayed onto the patient to regenerate natural healthy skin.  

CORPORATE

AVITA Medical, the former parent company of the AVITA Group, began as a laboratory spin-off in the Australian State of Western Australia.  AVITA Medical was formed under the laws of the Commonwealth of Australia in December 1992 and has operated as AVITA Medical since 2008. AVITA Medical’s ordinary shares originally began trading in Australia on the Australian Securities Exchange (“ASX”) on August 9, 1993. AVITA Medical’s American Depositary Shares (“ADSs”) traded over the counter on the OTCQX under the ticker symbol “AVMXY” from May 14, 2012 through September 30, 2019 and its ADSs began trading on the NASDAQ on October 1, 2019, under the ticker symbol “RCEL”.

On June 29, 2020, a statutory scheme of arrangement under Australian law to effect a redomiciliation of the AVITA Group from Australia to the United States of America was implemented (the “Redomiciliation”). The Redomiciliation was approved by shareholders on June 15, 2020 and approved by the Federal Court of Australia on June 22, 2020.

Pursuant to the Redomiciliation, all ordinary shares in AVITA Medical, the former parent company of the AVITA Group, were exchanged for shares of common stock in the Company.  As a result, the Company became the sole shareholder of AVITA Medical and the new parent company of the AVITA Group.  In conjunction with the Redomiciliation, an implicit consolidation or reverse split on a 1 for 100 basis was implemented whereby shareholders of AVITA Medical received one share of common stock in the Company for every 100 shares held in AVITA Medical.

Under the Redomiciliation, eligible shareholders in AVITA Medical received consideration in the form of :

 

five CHESS Depositary Interests (“CDIs”) in the Company for every 100 ordinary shares in AVITA Medical that were held by them; or

 

one share of common stock in the Company for every 5 ADSs in AVITA Medical that were held by them.

The Company’s CDI’s are quoted on the ASX under AVITA Medical’s former ASX ticker code, “AVH”. The Company’s shares of common stock are quoted on NASDAQ under AVITA Medical’s former NASDAQ ticker code, “RCEL”. One share of common stock on NASDAQ is equivalent to five CDIs on the ASX.

As a result of the ‘implicit consolidation’ that occurred under the Redomiciliation, the number of shares of common stock issued and outstanding in the Company (as set out in the consolidated financial statements) is less than the number of ordinary shares in AVITA Medical that was set out in the consolidated financial statements of AVITA Medical prior to August 28, 2020.  

COVID-19 IMPACT ON OUR BUSINESS

The coronavirus (“COVID-19”) pandemic has created significant disruptions to the global economies and financial markets.  In the United States, State and Local Governmental authorities have responded by issuing orders, of varying degrees, requiring quarantines, restrictions on travel, mandatory closures of certain non-essential businesses, as well as providing recommendations to minimize social gatherings or interactions. The Company’s business and operations have been impacted by COVID-19 as the effects of COVID-19 related travel restrictions have reduced accidents and the incidence of burns and burns admissions.  In addition, during the pandemic, our commercial team’s access to hospitals was limited to case attendance and training. As COVID-19 abates and the restrictions are lifted, we anticipate that burn related accidents will resume to pre-COVID levels. In response to the pandemic, we have taken certain business measures which include institution of various workplace protections to ensure the safety of our employees (e.g.,

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wearing of masks, wiping down high touch areas, etc.), and the limiting of vendors and visitors to our facilities. We have limited activities at our corporate headquarters, encouraged our employees to work from home, encouraged virtual meetings, restricted non-essential business travel, made physical modifications and enhancements to our facilities to effect social distancing, and provided personal protective equipment to our employees. We have increased safety stocks of our product, established temporary satellite product storage locations, and accelerated initiatives to increase sourcing options. Throughout the pandemic, we have remained focused on managing the business for the long-term, including maintaining our employee workforce as well as continuing to invest in critical research and development, clinical, and corporate infrastructure-related programs.

STRATEGY

Our objective is to become the leading provider of regenerative medicine addressing unmet medical needs in burn injuries, trauma injuries, and in dermatological and aesthetics indications, including vitiligo as well as cell and gene therapies. To achieve this objective, we intend to:

 

Become the standard of care in the U.S. burns industry by increasing RECELL System penetration in burn centers and with burn physicians

 

Commercialize the RECELL System in the U.S. for use in soft tissue reconstruction following completion of our current FDA pivotal study in soft tissue reconstruction

 

Commercialize the RECELL System in the U.S. for use in treatment of vitiligo following completion of our current FDA pivotal study in vitiligo

 

Accelerate commercial activities in Japan through our partner Cosmotec once we receive PMDA approval for RECELL with an indication in burns, soft tissue or vitiligo

 

Accelerate commercial activities outside of the U.S. and Japan once we have received FDA approval with RECELL System indications in soft tissue and vitiligo

 

Pursue potential commercialization opportunities for the RECELL System related to skin rejuvenation and Epidermolysis Bullosa indications following planned proofs of concept and related FDA pivotal studies

 

Further invest in our RECELL System platform to improve workflow, speed, and ease of use as it relates to specific indications, as well as to build upon our intellectual property estate

 

Pursue business development opportunities that are complementary to our core RECELL System indications and/or our targeted markets

 

Improve our margins and profitability by leveraging our current team and infrastructure across an expanding base of business in burns and in future indications

RECELL® PLATFORM

The RECELL System has a long-established safety profile, and clear potential for clinical and health-economic value propositions across a range of skin-related clinical indications. The patented and proprietary platform technology underlying Spray-On Skin Cells originated in Australia, based on the seminal work of Professor Fiona Wood and fellow scientist Marie Stoner. RECELL was initially launched in the E.U. during 2005, and then in Australia in 2006, ahead of pivotal outcomes data demonstrating clinical performance relative to standard care. Pivotal trials were conducted in the U.S. beginning in 2010. On September 2018 the U.S. Food and Drug Administration (“FDA”) approved the Class 3 device through a premarket approval (“PMA”) for the treatment of acute thermal burn injuries in patients 18 years and older.  Following receipt of our PMA, we commenced promoting the RECELL System in January 2019 in the U.S.  RECELL is a first-of-kind medical device approved through FDA’s Center for Biologics Evaluation and Research, and the first Class 3 device approved for use in burn care in over 20 years.

The RECELL System is a single use (disposable), stand-alone, battery operated, autologous cell harvesting device containing enzymatic and buffer solutions, sterile surgical instruments, and actuators to achieve the disaggregation and delivery of skin cells.  The platform technology of the RECELL System allows for the preparation and delivery of Spray-On Skin Cells, an autologous cellular suspension comprised of the patient’s own skin cells necessary to regenerate natural healthy epidermis. These Spray-On Skin Cells are prepared at the point of care in as little as 30 minutes, providing a new way to treat thermal burns, other wounds, skin injuries or

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defects of the skin. The skin cell suspension includes keratinocytes, fibroblasts, and melanocytes, all of which play critical roles in skin regeneration. The treatment of burns with RECELL yields proven and significant reduction in the harvesting of donor skin. Donor sites are of great concern amongst burn patients. Burn wounds treated using RECELL show comparable results in burn wound healing outcomes relative to conventional grafting, despite the use of 32.0-97.5% less donor site tissue. The ability of RECELL to retain melanocytes in the cell suspension is notable as these cells are critical for the restoration of natural pigmentation to the area treated, which is being further evaluated in ongoing clinical trials. Skin cell suspension is a powerful therapeutic with the potential for addressing unmet needs in a number of clinical indications, including burns, soft tissue reconstruction, and vitiligo.

RESEARCH & DEVELOPMENT

The launch of the RECELL System into the U.S. market provided an opportunity to gain valuable, in-depth insight into the patient care pathway, as well as the workflow for surgical management of burn wounds. We continue to commit significant and increasing resources in product development to ensure that our device continues to evolve and has robust patent protection. The next iteration of the RECELL System is currently under review with the FDA and will present a more streamlined workflow for enhanced ease-of-use in the clinical setting, while producing the same autologous skin cell suspension. This new version of the RECELL System is expected to be commercialized in the first half of calendar year 2022 and will offer improved convenience along with an opportunity to expand our intellectual property portfolio.

Further product development is ongoing on a next generation device for more automated implementation of the core Spray-On Skin Cells technology, to advance the user experience toward less hands-on processing time. With each iteration of our RECELL System development, we anticipate preservation of the therapeutic power of Spray-on Skin Cells, deployed in devices that become appropriate for use in an increasing range of clinical settings. This is particularly important as we aim to enter the dermatology space, where there is a shift toward an emphasis on the volume of patients treated in a day.

Cell-based gene therapeutic applications are an extension of the platform, where modified skin cells are applied in suspension for regeneration of skin (from genetically corrected or molecularly reverse-aged cells). For instance, in the case of rejuvenation, rather than skin regeneration directly from the patient’s own skin cells, harvested cells are planned to undergo a process of molecular reverse aging prior to reintroduction to the patient. Similarly, for Epidermolysis Bullosa (“EB”), harvested cells are planned to undergo a gene modification process to correct the underlying defect, such that when the EB wounds are treated, skin is regenerated that does not exhibit the characteristic blistering and fragility associated with EB.

In summary, our research and development efforts are currently focused on:

 

Further clinical development of the RECELL System in additional skin-focused clinical indications where the platform can be leveraged. Specifically, to expand our footprint within wounds and dermatology, such as soft tissue reconstruction and vitiligo. These activities are generally characterized by pivotal studies for which FDA has approved an Investigational Device Exemption (“IDE”)

 

RECELL platform technology evolution to improve workflow, speed, and ease of use

 

Expansion of the technology platform underlying the RECELL System into cell-based gene therapy, including combining the platform with other technologies, to allow development of the platform in other indications (including orphan indications)

 

Further research and characterization of the RECELL System design and the composition and activity of the Spray-On Skin Cells suspension to support further clinical development of the platform, and to expand our intellectual property estate

TARGET MARKETS

Burns

Acute thermal burns are life-threatening and debilitating injuries that are among the most challenging and expensive to manage. These injuries require complex surgical procedures, long and costly hospitalization, and have a high potential for clinical complications and requirement for rehabilitation and scar treatment. In the U.S., the largest market for the treatment of burns, approximately 486,000 people seek treatment for burns each year. Of these, at least 40,000 have burn injuries severe enough to require hospital admission, and it is estimated that 3,300 patients die each year. The majority of patients treated on an inpatient basis in the U.S. are treated in specialized burn centers.

Severe burns (typically defined as second- and third-degree) are commonly treated with autologous split-thickness skin grafts (“STSGs”) to achieve definitive closure of the burn wound. In a STSG, or autograft, donor skin is harvested from a healthy area of the patient’s skin. The donor skin is then typically perforated into a mesh that can be expanded and transferred to cover the prepared burn

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injury. Treatment with STSG results in additional trauma for the patient due to creation of a new donor site wound. Although the use of STSG has been a standard treatment for more than 50 years, autografting is associated with significant pain, itching, infection, dyschromia, dyspigmentation, delayed healing, and hypertrophic scarring of the donor site.

The clinical benefits of earlier wound closure are well recognized and include increased survival, reduced hospital length of stay, decreased pain duration, and reduced infection-related complications. However, in large burn injuries, the patient may have insufficient donor skin available to allow for immediate and complete treatment of the entire burn injury area when using traditional grafting techniques. The lack of available healthy donor skin in patients with large burn injuries is often the central problem impacting time to autografting and definitive closure of the wounds. In extensively burned patients, surgeons often must wait until the donor sites have healed so they can re-harvest from the sites, resulting in delays in treatment and closure, requiring multiple procedures, and extending hospital stay. While waiting for donor skin, the burn wounds may be temporarily covered by allogeneic skin (allograft, cadaver skin) or xenograft (typically pig skin). The overall cost of treatment with STSG is expensive - for example it would cost approximately $579,000 and 59.4 days in hospital for a patient with a 40% Total Body Surface Area (“TBSA”) mixed-depth burn injury to recover and return to normal day to day activities.

The RECELL System was approved by the FDA in September 2018 for the treatment of second- and third-degree acute thermal burn injuries in patients 18 years and older. In June 2021, the FDA approved an expanded indication for use to also include treatment of full-thickness (third-degree) pediatric burns, which represent close to a quarter of all burn injuries in the U.S., as well as full-thickness burn injuries greater than 50% TBSA. As a result of having achieved an expanded indication for use in pediatric burns, the BARDA-funded U.S. Pediatric Burns trial has been closed to new enrollment (refer to BARDA Contract section below).

The pivotal studies leading to the RECELL System’s FDA PMA for the treatment of acute thermal burns demonstrated that the RECELL System treated burns used 97.5 percent less donor skin when used alone in second-degree burns, and 32 percent less donor skin when used with autograft for third-degree burns, compared to standard of care autografting. In these studies, a statistically significant reduction in donor skin required to treat burn patients with the RECELL System was realized without any associated compromise to healing or safety outcomes. Donor site outcomes from the clinical trial for second-degree burns also revealed a statistically significant reduction in patient-reported pain, increased patient satisfaction and improved scar outcomes.

The RECELL System offers fewer procedures required for definitive closure versus conventional autografts. In pediatric cases using the RECELL System, there were 56% fewer mean surgical procedures (N = 284) compared to the American Burn Association’s National Burn Repository (“NBR”). Additionally, in patients with >50% TBSA, the RECELL System provided 60% fewer mean surgical procedures versus NBR (N =354).

In addition to robust clinical data, RECELL has proven health economic benefits and a compelling cost-effectiveness model which shows that treatment using the RECELL System for deep partial-thickness burns reduces total treatment costs by an average of 26%, or approximately $37,000, for patients with 10% TBSA and approximately $150,000, for patients with 40% TBSA. For full-thickness burns, treatment using the RECELL System reduced total treatment cost by 3%, or approximately $6,000 for patients with 10% TBSA and by 42% or approximately $243,000, for patients with 40% TBSA. These cost reductions are attributed to decreasing the length of hospital stay, reducing the number of procedures required to close the burn wound, and minimizing the donor site size and associated wound care. All of these cost savings estimates are net of the cost of the RECELL System.

A budget impact model was developed and has been used to calculate the annual budget impact of current standard of care for the treatment of burns versus treatment using the RECELL System for a burn center with 200 patients. The model shows that treatment using the RECELL System reduces annual total treatment costs from approximately $39.4 million to $32.6 million, saving 17% or approximately $6.8 million per year.

The market for treatment of burns in the U.S. is highly concentrated, with approximately 136 burn centers and approximately 300 burn surgeons who treat the majority of severe burns in the country (i.e., ~75%). Accordingly, our target market is predominantly focused on burn centers. Our goal is to establish RECELL as the standard of care for any burn injury that requires grafting for patients with 5% TBSA injury or greater. Within burn centers, we estimate that there are approximately 25,000 patients annually that could benefit from our technology and equates to a serviceable annual addressable market of ~$260 million. Each RECELL System can treat up to 10% TBSA, and many patients will require more than one device.

AVITA has a policy of not providing the RECELL System to a provider until they have been certified, which includes extensive training in the use of the product and in the aftercare of the patient. In general, we have found that most U.S. burn centers follow the industry-standard process of evaluating the RECELL System and then taking it through their hospital’s Value Analysis Committee (“VAC”) prior to purchasing. This process can sometimes be a lengthy one, taking 6 months or more to complete. As a result of training requirements and the VAC process, we have found that full adoption of the RECELL System among U.S. burn

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centers occurs on a gradual basis, in many cases over multiple years. In general, most surgeons follow a typical adoption curve, starting from where they see the greatest economic and clinical value, which is the use of RECELL for treatment of larger burns. With time and continued use, surgeons typically progress to adoption of RECELL for smaller, less severe burns and facial burns. Each surgeon traverses the adoption curve at a different rate – some in as few as 6 months and others expected in 3-5 years.

In the U.S., existing reimbursement codes were in place prior to the commencement of commercial sales of the RECELL System. For inpatient treatment of burn patients, U.S. hospitals are reimbursed under DRG (Diagnosis Related Group) Codes based on diagnosis of a patient’s injuries. Future expansion of use of the RECELL System for treatment of burns in the outpatient setting will require us to successfully obtain incremental reimbursement coverage for use of the RECELL System in that setting. In August 2020, we filed a Transitional Pass-through Payment Application (“TPT”) with The Centers for Medicare & Medicaid Services (“CMS”) to support separate, additional Medicare payment for use of the RECELL System. If approved, CMS would create a new “C code” and would allow use of the RECELL System to be billed and paid separately in hospital outpatient facilities and ambulatory surgical centers. On July 19, 2021, CMS released the 2022 Medicare Hospital Outpatient Prospective Payment System proposed rule which contained a review of RECELL’s Transitional Pass-through Payment application. CMS is inviting public comment on whether the RECELL System meets the device pass-through payment criteria discussed in the document. The Company expects to be informed of CMS’s decision on our TPT submission towards the end of December 2021, with the code expected to go into effect in early 2022. Importantly, the Company will then need to work with commercial carriers to ensure broader coverage once the code has been granted. The TPT code is not indication specific, so as AVITA gains approval of additional indications outside of acute thermal burn treatment, the same code will apply. For physicians, CPT (Current Procedural Terminology) codes for use in RECELL System procedures are recommended by the American Burn Association and are the same for both inpatient and outpatient use.

Outside of the U.S., Japan is the second largest healthcare market.  There are approximately 6,000 patients/per year who suffer from severe burns in Japan who would be a target for the RECELL System. Large patient populations coupled with healthy reimbursement coverage makes Japan an attractive market for the RECELL System. In February 2019 we entered into a collaboration with Cosmotec Company, Ltd (“COSMOTEC”), an M3 Group company, to market and distribute the RECELL System for the treatment of burns, other wounds, and vitiligo in Japan. We continue to work with COSMOTEC to advance our application for approval to market the RECELL System in Japan pursuant to Japan’s Pharmaceuticals and Medical Devices Act (“PMDA”). The Company anticipates regulatory approval in Japan by the end of December 2021 and that COSMOTEC will commercially launch RECELL in Japan during calendar year 2022. Although RECELL was submitted for a broad indication for use including all acute wounds and vitiligo, it is unclear whether the PMDA will grant COSMOTEC labelling outside of burns where the Company has the most robust data.

Given the size and concentration of the U.S. & Japanese markets, our commercial efforts are almost exclusively focused on these geographies. Our highly limited effort in other non-U.S. regions is based on our assessment that the acute burn market in many countries is proportionately less than the market in the U.S., and the investments in full marketing and sales including the effort to obtain reimbursement are not justified until we have obtained pivotal clinical results in additional indications. In Australia and Europe, the RECELL System is no longer actively promoted, and our commercialization efforts are limited to filling sales orders as received from a small group of customers previously trained in use of the product. As additional pivotal data for the RECELL System are generated in additional indications, we plan to accelerate commercialization of the RECELL System in countries outside the U.S. through a combination of collaborations and direct efforts, depending upon the region and indication.

Soft Tissue Reconstruction

Soft tissue reconstruction includes treatment of injuries caused by non-burn trauma, including excision of infected tissue, such as necrotizing soft tissue infections. While minor skin defects may be primarily closed with sutures or standard wound care, larger open defects require more complicated approaches, including skin grafts, tissue flaps and dermal matrices.

Similar to the burns indication, soft tissue reconstruction is associated with large areas of skin loss and as such, some of the top unmet needs identified by surgeons are closely aligned:

 

Reduced donor skin harvesting

 

Reduced scarring

 

Reduced pain

 

Uniform pigmentation with surrounding skin

Given the interest to reduce donor skin harvesting, just as with the burns indication, we designed a clinical trial to demonstrate the use of less donor skin without compromising healing outcomes relative to conventional autografting. The trial is essentially a repeat of the successful previous trial in full-thickness burns, but with a population of patients with full-thickness, non-burn injuries.

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On September 17, 2019, the FDA approved an Investigational Device Exemption (“IDE”) to conduct a pivotal trial evaluating the safety and effectiveness of the RECELL System in combination with meshed autografting for the treatment of acute full-thickness skin defects. Subsequently, on March 2, 2020, we initiated a prospective, multi-center, randomized controlled study for soft tissue reconstruction with the enrollment of the first patient at the Arizona Burn Center at Valleywise Medical Health Center in Phoenix, AZ. Each patient will have a control wound treated with conventional skin grafting and a wound treated with expanded skin grafting in combination with RECELL. Enrollment of this pivotal study is ongoing. As of the end of our 2021 fiscal year, we had enrolled 32 out of 65 patients and we expect enrollment to be completed during calendar year 2022.

Open wounds associated with traumatic injuries caused over 4.5 million hospital visits in the U.S. in 2017, and traumatic wounds rank among the five most costly medical conditions. We estimate that the total annual addressable market for RECELL in soft tissue reconstruction is approximately $1 billion. Approximately 80% of our current burn accounts represent opportunities for use of RECELL in soft tissue reconstruction. We plan to build out our existing field team to cover >400 target accounts in acute wounds (representing burn and high-volume trauma accounts). As such, our estimated annual serviceable addressable market in soft tissue reconstruction is approximately $450 million. Degloving (a type of injury where the skin is ripped from the underlying tissue), abrasions and infectious disease (e.g., necrotizing soft tissue infections, like flesh-eating disease), have the greatest stated intent to use, based on market research. We believe RECELL will be used in both the inpatient & outpatient settings and in general, with wounds 5% TBSA and larger.

From a reimbursement perspective, the same CPT (physician payment) coding that is currently being used in burns can be leveraged. Assuming we are successful securing an outpatient TPT code, this same TPT code, which is not indication specific, could be utilized for soft tissue reconstruction.

RECELL has been successfully used outside the U.S. for many years and there exist several case reports on the treatment of traumatic injuries (soft tissue reconstruction) that have been the subject of peer-reviewed scientific publications and presentations at medical conferences. Patients with traumatic injuries have also been treated using the RECELL System under the U.S. Compassionate Use program and although AVITA does not promote the use of RECELL in soft tissue reconstruction in the U.S., some surgeons have started successfully using the product. This is not surprising as many burn surgeons also work in Level 1/Level 2 trauma centers and treat a great deal of traumatic wounds and as mentioned earlier, acute wounds (regardless of burn or non-thermal origin) present the same unmet needs and have similar treatment protocols. In summary, soft tissue reconstruction is a significant opportunity which AVITA can pursue leveraging its existing resources. Further, this opportunity is significantly de-risked based on the historical performance of the product in this indication.

Vitiligo

Vitiligo is a disease that causes the loss of skin pigmentation, or color, in patches that tend to increase in size over time. The extent and rate of color loss from vitiligo is unpredictable, can affect the skin on any part of the body, and may also affect hair and the inside of the mouth. Vitiligo occurs when melanocytes, the pigment-producing skin cells, die or stop producing melanin, the pigment that gives skin, hair, and eyes color. Vitiligo is believed to be an autoimmune disorder in which a patient’s immune system attacks and destroys the melanocytes in the skin. It may also be caused by heredity factors or a triggering event, such as sunburn, stress, or exposure to industrial chemicals. Vitiligo affects people of all skin types, but it may be more noticeable in people with darker skin. It is estimated that worldwide vitiligo prevalence is between 0.5-2% of the population. The condition is not life-threatening or physically painful, but it can significantly alter physical appearance, have negative emotional and psychological consequences, and impair quality of life.

Vitiligo cannot be cured at present, and medical treatments generally fall into one of two categories:

 

1.

Treatments to arrest the spread of vitiligo, such as steroid creams and non-steroidal anti-inflammatory creams. There are also a number of therapies under development designed to target the underlying autoimmune disease. One challenge in terms of achieving the desired patient outcome is that stopping the spread of vitiligo may not restore pigmentation to the areas already damaged.

 

2.

Treatments to restore pigmentation include skin grafting, laser phototherapy (with and without topicals), and Melanocyte-Keratinocyte Transplantation Procedure (“MKTP”). MKTP requires expensive and substantial laboratory equipment and is currently only available in 4 locations in the U.S.

RECELL does not treat the underlying disease. Rather, it addresses the second category only and works to restore pigmentation. The key unmet need is a durable, one-time treatment that has potential to be scalable. MKTP has been proven to be effective but is only available in 4 U.S. locations due to complexity and the associated substantial investment in lab equipment. The procedure is also lengthy (3 hours). RECELL is a similar procedure, however, it can be done in as little as 30 minutes, in any dermatology setting. Compared to MKTP, RECELL is essentially a lab in a box that can be easily distributed.

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Interest in vitiligo treatment tends to increase in individuals who have lesions in more visible areas (such as the face and hands) as well as the younger population (<40). We estimate that there are approximately 1.3 million people in the U.S. with stable vitiligo who would be both eligible and interested in a surgical approach which equates to a total addressable market of over $5 billion. The RECELL treatment is initially anticipated to be provided by a vitiligo specialist and surgical dermatologist in the office setting and we estimate that this will likely not exceed 1,000 physicians. Approximately 188,000 vitiligo patients who have insurance or the ability to pay are likely at those target call points, and this equates to a serviceable market opportunity of approximately $750 million.  

The market is expected to grow, especially over the next decade with the advent of novel treatment options including oral and topical Janus Kinase (“JAK”) inhibitors. Although these new products will both stabilize and re-pigment some patients, it is anticipated that many patients will need additional modes of treatment for re-pigmentation. Further, large pharmaceutical companies with assets in development will likely invest in disease awareness campaigns which will further grow consumer awareness and the market.

 On December 23, 2019, the FDA approved our IDE application to conduct a feasibility study evaluating the safety and effectiveness of the RECELL System for re-pigmentation of depigmented lesions associated with stable vitiligo. This study is a single site study being conducted at the University of Massachusetts Medical School in ten (10) patients that have had vitiligo stable for at least one year. Areas of the vitiligo lesion will be randomly treated with slightly varying cell suspensions prepared using RECELL to confirm response rates and optimal suspension parameters, as well as to compare outcomes and cell suspension characteristics with MKTP. The randomized controlled study’s primary effectiveness measure is the percent area of repigmented skin 24 weeks after treatment, as evaluated by a clinician blinded to the treatment assignment. Additional effectiveness data collected over the course of the 24-week study will include blinded evaluator categorization of treatment success and patient rating of repigmentation. The Company commenced enrollment in the vitiligo feasibility study in September 2020 and as of the end of the 2021 fiscal year had completed treatment of 5 of the 10 patients.

In addition to the abovementioned feasibility study, on July 1, 2020, the FDA approved our IDE application for a pivotal study in vitiligo which is titled “A Prospective Multi-Arm Blinded-Evaluator Within-Subject Randomized Controlled Clinical Study to Investigate the Safety and Effectiveness of RECELL for Repigmentation of Stable Vitiligo.” The primary endpoint compares the incidence of 80% repigmentation of RECELL-treated areas versus that of phototherapy control-treated areas. The Company commenced enrollment in the vitiligo pivotal study in September 2020 and had treated 16 patients as of June 30, 2021.  While the pivotal trial design initially had 3 separate arms evaluating the clinical performance of varying cell suspensions (1:5, 1:10, and 1:20 donor expansion), we are in discussion with FDA concerning a single-arm design to evaluate only the 1:20 cell suspension. With a single arm design, it will be possible to complete enrollment in the pivotal program during calendar year 2021.

We expect revenue from the vitiligo business to stem from both cash pay as well as patients for whom treatment is covered by insurance. Vitiligo rates a ‘7.61’ on the Dermatology Life Quality Index (“DLQI”), which is in the same range of other aesthetic dermatological disease analogs which receive healthy positive reimbursement such as Rosacea (5.2), Psoriasis (9.3) and Atopic Dermatitis (12.79). As such, we are optimistic that we will achieve both coding and coverage for the desired indication. Further, large commercial carriers such as Cigna have recently announced coverage up to $38,000 annually for excimer laser phototherapy for vitiligo, indicating yet another signal in the importance of therapy for this disease.

The Company has a high degree of confidence that the RECELL System can be an effective therapeutic offering for patients with stable vitiligo. More than 1,000 patients have been successfully treated with the RECELL System for stable vitiligo outside of the U.S., and to date there are eleven (11) publications demonstrating the benefits of the RECELL System in vitiligo. Vitiligo is a large and untapped market with no FDA-approved treatments. RECELL would be the first point-of-care device for preparation of pigment cell suspension which could offer a single application treatment for patients with stable vitiligo.

Epidermolysis Bullosa

The RECELL System has been studied in a wide variety of indications and has been shown to enable patients to regenerate natural healthy skin in instances where the patient’s outer skin covering, or epidermis, has been lost or damaged. In addition to these applications of the RECELL System, we are pursuing related opportunities where the RECELL System’s ability to harness the natural healing capabilities of the body could be augmented with the use of genetically modified cells for treatment of certain genetic skin disorders. In this way, the RECELL System could potentially be used as a vehicle for other therapeutic offerings.

Epidermolysis Bullosa (“EB”) is a rare and incurable group of disorders caused by mutations in genes encoding structural skin proteins. EB is characterized by skin fragility and blistering leading to chronic wounds due to normal mechanical trauma. Dystrophic EB (“DEB”) is often associated with widespread blistering, pain, pruritus, extensive scarring, increased risk of squamous cell carcinoma with increased mortality. Signs typically occur at birth and persist over a lifetime. Currently, there are no FDA-

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approved treatments. All treatment options are palliative—focused primarily on pain and nutritional management, itching relief, and wound care (bandaging) with a significant cost burden ranging from $200,000-$500,000 per year per patient.

In November 2019, AVITA entered into a research agreement with the Gates Center for Regenerative Medicine at the University of Colorado School of Medicine (“Gates Center”) for the purpose of seeking to establish pre-clinical proof-of-concept for a spray-on treatment of genetically corrected cells. Pursuant to this agreement, we are pairing the RECELL System Spray-On Skin Cells technology and expertise with the Gates Center’s innovative patent-pending combined reprogramming and gene-editing technology, to allow the skin cells of patients with EB to function properly. Under the arrangement with the Gates Center, we retain the option to exclusively license technologies emerging from the partnership for further development and commercialization.

There are several products in development for EB, including other gene therapies, but to our knowledge this will be the first spray-on method explored for the delivery of a gene therapy for a genetic skin disease. We expect the developed technology to be widely applicable, and agnostic to the gene correction approach used. Further, Gates Center’s patented approach is unique in that it is designed to correct the underlying defect in the gene and not just augment with additional copies of genes. It also enables a single step, integration-free reprogramming which enables expansion of corrected cells. Further, many of the products in development are targeted at addressing symptoms of the disease and are not curative, while others will require repeat administration versus a “one and done” approach. Others have faced significant developmental delays. In addition, we believe that spray-on delivery of genetically corrected cells for in situ skin regeneration will have significant benefits over epidermal sheet-based delivery. Without the requirement for cultured sheets, delivery of the therapeutic will be faster and more logistically practical without the challenges associated with production and transportation of fragile, confluent sheets. Moreover, Spray-On Skin Cell delivery to patients is significantly less complex as the treatment area is sprayed and dressed as opposed to suturing on an epidermal graft that does not always “take.”

DEB is an orphan disease with a prevalence of approximately 6 per million with the majority of individuals not surviving past their 30th birthday.  In the U.S., we estimate there are approximately 900 EB patients eligible for the technology that we have in development and that the price point would be in the range of $850,000, leading to a $750 million addressable market. We also believe there are potential faster regulatory pathways to market by leveraging FDA programs for orphan diseases, and a high probability of reimbursement success and quick adoption given the dire need from patients.

This agreement marks an important milestone in AVITA’s strategy to expand the potential of our regenerative medicine platform and is another step towards our mission of improving patients’ lives and addressing unmet needs, including those conditions that are driven by genetic aberrations.  Further, this program could enable diversification beyond EB as the technology has potential applicability to other EB sub-types and over 50 other genetic skin disorders such as epidermolytic icthyosis and Hailey-Hailey disease. We expect to realize proof of concept with its EB-related work with Gates Center by the end of December 2021.  

Rejuvenation

We believe that reversing aging at a cellular level has the potential to impact rejuvenation by driving functional changes to skin cells. This will be significantly different from existing products, such as cosmeceuticals that supplement proteins to cells, and surgical approaches that do not alter cellular stat but alter tissue morphology. An approach for molecular reversal of the underlying defects resulting in aging could have a profound effect on rejuvenation.

In November 2020, AVITA announced a preclinical research agreement with the Houston Methodist Research Institute (“HMRI”) to explore molecular reversal of cellular aging through a novel cell suspension delivery system. AVITA retains the option to exclusively license HMRI’s patented technology as well as the right of first negotiations to HMRI’s technologies emerging from the partnership for further development and commercialization.  AVITA expects to realize proof of concept with its rejuvenation work with HMRI by the end of December 2021.  

HMRI is a compelling partner for this work. Dr. John Cooke and his team have developed a novel, patented approach of telomerase reverse transcriptase delivery to reverse cellular aging and have been widely recognized as leaders in this space with multiple peer reviewed publications, grants, and awards. Further, HMRI has a strong program in translational medicine, including the Center for Rapid Device Translation that supports preclinical testing and GLP environments which could enable rapid translation from research into clinical trials.

American consumers spend over $16 billion on aesthetic procedures per year. 10 million injectable cosmetic procedures were performed in 2019. While these are popular procedures, they do not address skin tone, texture, or tightness. Approximately 350,000 facelift and forehead lift procedures were performed in the same time period. The dramatic differences in procedure volumes are likely due to invasiveness and fear of surgery (including general anesthesia) as well as cost. Consumers are seeking a natural, more youthful appearance and there is a whitespace in the market for a minimally invasive procedure that provides meaningful results.

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SALES AND MARKETING

We sell the RECELL System in the U.S. through our direct commercial organization consisting of 23 field personnel who are supported by corporate marketing, reimbursement, scientific and medical affairs, operations, and corporate leadership. The field sales team was recruited and hired subsequent to the September 2018 FDA PMA and trained prior to the U.S. market launch of RECELL in January 2019. Our field organization is composed of highly experienced medical sales representatives as well as former burn nurses averaging 19 years of sales experience and 10 years of burns experience. We believe that our current field organization is of an appropriate size, without significant additions, to reach the burn surgeons and other key decision makers and staff associated within U.S. burn centers.

A primary objective of our field sales team is to build upon burn community awareness that has resulted from an extensive series of RECELL System related burn conference presentations and scientific publications to further expand interest in the clinical and economic benefits of the RECELL System. In addition, our field sales team provides robust clinical case support and staff training. It is not uncommon in the burn community to have rotating staff and it is our commitment for all those working with RECELL to be comfortable with the technology both during the procedure as well as during aftercare.

HUMAN CAPITAL

AVITA’s investment in the U.S. commercial success of RECELL has led to the development of best-in-class teams supporting sales, clinical education and training, reimbursement, medical affairs, as well as corporate management and infrastructure. As of June 30, 2021, we had approximately 108 employees full-time and part-time employees. As of June 30, 2021, 97.3% of our workforce was based in the United States, with a significant number of our management and professional employees having prior experience with leading medical product, biotech, or pharmaceutical companies. None of our employees are covered by collective bargaining agreements.

We embrace differences, diversity and varying perspectives amongst our employee base and are proud to be an equal opportunity employer. We do not discriminate based on race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, genetic information, marital status, sex, gender, gender identity, gender expression, age, military or veteran status, sexual orientation or any other protected characteristic established by federal, state, or local laws. A diverse workforce as well as an inclusive culture and work environment are fundamentally important and strategic to us beginning with our Board of Directors and CEO and extending to all levels of the Company. As of June 30, 2021, our executive leadership team was 50% female, our senior leadership team was 40% female, and our total employee base was 47% female. In addition to promoting gender diversity, we encourage ethnic diverse talent when recruiting as well as provide employee training and development focusing on workplace diversity and inclusion.

INTELLECTUAL PROPERTY

We seek to protect our intellectual property, core technologies and other know-how through a combination of patents, trademarks, trade secrets, non-disclosure and confidentiality agreements, licenses, assignments of invention and other contractual arrangements with our employees, consultants, partners, suppliers, customers, and others. Additionally, we rely on our research and development program, clinical trials, know-how and marketing programs to advance our products and product candidates, and to expand our intellectual property rights.  

 

As of June 30, 2021, we have been granted a total of 56 patents and have 26 pending patent applications worldwide. AVITA owns granted patents in Austria, Australia, Belgium, Brazil, France, Germany, Hong Kong, Italy, Japan, Netherlands, Portugal, Spain, Sweden, Turkey, United Kingdom and USA, as well as pending patent applications in Brazil, Canada, China, Europe, Hong Kong, and the United States. AVITA’s patent portfolio covers AVITA’s core RECELL System, methods of using the RECELL System, the Regenerative Epidermal Suspension (“RES®”) suspension, methods of evaluating the therapeutic potential of RES, methods of preparing a cell suspension with exogenous agents to promote wound healing, as well as to one or more automated systems for tissue processing and preparation of cell suspension. AVITA’s pending patent applications cover an all-in-one RECELL System embodiment, as well as new modifications to RES that are showing potential for therapeutic results. We expect that our research and development pipeline, strategic partnerships with universities, and improvements to the RECELL System and RES will result in additional and diverse patent applications for both compositions of matter and related methods of use in the next calendar year.

 

In 2019, AVITA filed a Patent Term Extension (“PTE”) application with the U.S. Patent and Trademark Office requesting an extension of the patent term of U.S. Patent No. 9,029,140, “Cell suspension preparation technique and device” as a result of the time required for the FDA regulatory process. If the term extension requested in the PTE application is approved, the patent term of U.S. Patent No. 9,029,140, which covers the RECELL System, will be extended to April 9, 2024. AVITA’s other patents have expected expiration dates ranging from 2022 to 2040.

 

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Additionally, AVITA owns and defends a global trademark portfolio comprising over 120 registered trademarks and pending trademark applications, including the trademarks “RECELL,” “Spray-On Skin,” the RECELL System logo, “RES,” and others in the U.S. and international markets. In addition to patent and trademark protection, we also rely on trade secrets, know-how, and other proprietary information to develop and maintain our competitive position. We have robust confidentiality and invention disclosure procedures in place that incentivize our employees to innovate and allow us to maintain our rights to AVITA innovations.

FACILITIES

AVITA leases approximately 17,500 square feet of administrative and office space in Valencia, CA that is currently leased through July 31, 2022. The Company operates an FDA-registered production plant in Ventura, California, in a 27,480 square foot facility that is currently leased through September 30, 2024. We have two 3-year options to extend the lease, at our sole option, which allows for a total lease extension period through September 30, 2030. We also lease a limited amount of incubator space in Irvine, CA for scientific research and product development activities.

 

MANUFACTURING, SUPPLY AND PRODUCTION

We produce the RECELL System in the Ventura facility under current Good Manufacturing Practices (“cGMP”) and per ISO 13485, which also meets the regulatory requirements of other jurisdictions in which we sell the RECELL System. We maintain a state of regulatory compliance and inspection readiness at all times, and any future material changes to our production processes for the RECELL System will be submitted for approval to the FDA and regulatory authorities in other jurisdictions as required.

Within the Ventura facility we perform the final manufacturing, assembly, packaging, and warehousing of the RECELL System. Also included within the Ventura facility is a secure controlled-temperature warehouse that complies with the vendor-managed inventory (“VMI”) requirements of the contract with Biomedical Advanced Research and Development Authority (“BARDA”). See below for details.

AVITA sources multiple components, sub-assemblies, and materials from third-party suppliers, who are required to meet our cGMP quality specifications and associated regulatory requirements. To ensure continuity of supply, we maintain multiple sources of supply for key components, subassemblies and materials, and the majority of critical raw materials and services have multiple qualified suppliers. While a small number of materials remain single sourced, we are actively working to qualify and validate additional suppliers for these materials as we continue to evaluate methods of removing risk from the supply chain for the RECELL System. We believe that our current manufacturing capacity at the Ventura facility is sufficient to meet the expected commercial demand for the RECELL System for burns, as well as other indications under development, for the foreseeable future.

AVITA serves the U.S. burn market by shipping the RECELL System directly from our Ventura facility to U.S. burn centers. From time-to-time we also store small quantities of the RECELL System at satellite distribution sites within the U.S. to better support access of the RECELL System to our U.S. customers.

BARDA CONTRACT

We have a contract with the Biomedical Advanced Research and Development Authority (“BARDA”), under the Assistant Secretary for Preparedness and Response, within the U.S. Department of Health and Human Services, valued at approximately $53.4 million. The contract provided funding for the development of the RECELL System.  The contract will continue to provide funding for future use of the product as a medical countermeasure to assist disaster preparedness and response in the U.S. for mass casualty events involving burn injuries. We entered into the contract on September 29, 2015, and the scope has expanded through a number of amendments to the contract. The contract may be terminated earlier at the option of BARDA, but otherwise continues to December 31, 2023.

Under the contract, BARDA has provided funding and technical support for the development of the RECELL System. BARDA funded the completion of two randomized, controlled pivotal clinical trials, as well as Compassionate Use and Continued Access programs, and development of the health economic model demonstrating the cost savings associated with the RECELL System. BARDA exercised a contract option to fund a randomized, controlled clinical trial for a pediatric early intervention study which commenced enrollment in March 2020, and closed to enrollment in June 2021, subsequent to FDA-approval of an expanded RECELL indication for use that includes treatment of pediatric patients. Also included in the BARDA contract was a provision for procurement of the RECELL System under a vendor-managed inventory system to bolster emergency preparedness in the amount of $7.6 million. Further, BARDA expanded the awarded contract to provide supplemental funding of $1.6 million to support the logistics of emergency deployment of RECELL Systems for use in mass casualty or other emergency situations. Delivery of RECELL Systems

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under the VMI plan was completed during the fourth quarter of fiscal year 2021. As of June 30, 2021, we had received cumulative payments of $30.9 million under the BARDA contract.

COMPETITION

The medical device, biotechnology and pharmaceutical industries are intensely competitive and subject to significant technological change and changes in practice. While we believe that our innovative technology, knowledge, experience, and scientific resources provide us with competitive advantages, we may face competition from many different sources with respect to the RECELL System or any product candidates that we may seek to develop and commercialize in the future. Possible competitors may include medical device, pharmaceutical and wound care companies, academic and medical institutions, governmental agencies, medical practitioners, and public and private research institutions, among others. Any product that we successfully develop and commercialize will compete with both existing therapies and any new therapies that may become available in the future.

Our primary competitor in the burns market is the current standard of care, primarily split-thickness autografts. Although the RECELL System is complementary with autografts for the treatment of many burn injuries, we face competition from this traditional surgical procedure for many burn patients. However, based on our clinical trials, we believe that the RECELL System has sustainable competitive clinical and economic advantages over this current standard of care. We face additional competition in the burns market from other FDA-approved products such as Epicel® provided by Vericel Corporation as well as from Stratagraft® provided by Mallinckrodt.

 

GOVERNMENT REGULATIONS

FDA and International Regulation

The production and marketing of the RECELL System and any additional product candidates developed in future ongoing research and development activities are subject to regulation by numerous governmental authorities including the FDA in the U.S. and similar agencies in other countries throughout the world.  Pursuant to its authority under the Federal Food, Drug, and Cosmetic Act (FD&C Act), the FDA has jurisdiction over medical devices in the U.S. The FDA regulates the design, development, manufacturing, and distribution of medical devices to ensure that medical products distributed domestically are safe and effective for their intended uses. The FD&C Act classifies medical devices into one of three categories based on the risks associated with the device and the level of control necessary to provide reasonable assurance of safety and effectiveness. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device are categorized as Class III. These devices typically require submission and approval of a PMA. The RECELL System is categorized as a Class III medical device, and in September 2018 the FDA granted our PMA for use in the treatment of acute thermal burns in patients 18 years and older. In June 2021, the FDA approved a supplement to our PMA to expand the use of RECELL in pediatric patients with full-thickness burns. Approval of the RECELL System for use in the treatment of new indications in the U.S. will require additional PMA supplement submissions to the FDA following successful completion of clinical studies.

To support PMA supplements in the U.S. or applications for approval in other regions, the completion of additional clinical and non-clinical studies and supporting development activities will likely be required. Clinical trials can take many years to complete and require the expenditure of substantial resources. The length of time varies substantially according to the type, complexity, novelty and intended use of the product candidate. We cannot make any assurances that once clinical trials are completed by us or a collaborative partner, that we will be able to submit as scheduled a marketing approval request to the applicable governmental regulatory authority, or that such request and application will be reviewed and cleared by such governmental authority in a timely manner, or at all. Although we intend to make use of fast-track and abbreviated regulatory approval programs when possible and commercially appropriate, we cannot be certain that we will be able to obtain the clearances and approvals necessary for clinical testing or for manufacturing and marketing our product candidates. Delays in obtaining regulatory approvals could adversely affect the development and commercialization of our product candidates and could adversely impact our business, financial condition, and results of operations. During the course of clinical trials and non-clinical studies, product candidates may exhibit unforeseen and unacceptable safety considerations. If any unacceptable side effects were to occur, we may, or regulatory authorities may require us to, interrupt, limit, delay or abort the development of our potential products.

Any products manufactured or distributed by us pursuant to regulatory approvals are subject to continuing regulation by the FDA and similar agencies in other countries, including maintaining records supporting manufacturing and distribution under Current Good Manufacturing Practice (“cGMP”) regulations, periodic reporting, advertising, promotion, compliance with any post-approval requirements imposed as a conditional of approval, recordkeeping and reporting requirements, including adverse events experiences. After approval, material changes to the approved product, such as adding new indications or other labeling claims, or changes to the manufacturing process, are subject to prior approval by FDA and other regulatory agencies. Medical device manufacturers and their subcontractors are required to register their establishments with the FDA, certain state agencies and international agencies.

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Subcontractors are subject to periodic announced and unannounced inspections by the FDA and other agencies for compliance with cGMP requirements. We have established processes in place for categorization of vendor criticality and the associated activities for qualification and monitoring of vendors. These activities include but are not limited to, requiring certification of supplier in conformance to relevant cGMP regulations and other FDA and international agency regulatory requirements, approved supplier lists, and regular Company conducted audits. In addition, all goods and services purchased from suppliers by us must be purchased from only those suppliers on the approved supplier list. Furthermore, the Company itself will continue to comply with all relevant FDA requirements and regulations and any applicable international agency regulatory requirements in its continued manufacturing and promotion of its FDA approved commercial product.

 

In addition to FDA approval in the U.S., the RECELL System is TGA-registered in Australia for use in the treatment of burns, acute wounds, scars, and vitiligo. In the European Union, the RECELL System has received CE-mark approval for the treatment of burns, chronic wounds, scars, and vitiligo. In February 2019, our marketing partner COSMOTEC filed a Japan’s Pharmaceuticals and Medical Devices Act (“JPMDA”) application for approval to market the RECELL System in Japan for the treatment of burns and other wounds. The JPMDA has accepted the application and the review is ongoing with approval expected to occur during 2021.

 

HEALTHCARE LAWS AND REGULATIONS

AVITA is a manufacturer of a medical device and therefore we are subject to regulations by the FDA and various federal and state healthcare laws and regulations. These regulations govern our advertising and promotional practices, our interactions with healthcare providers (HCPs), and our reporting of any payments made to HCPs. AVITA is committed to the highest standards of business conduct in accordance with the AdvaMed Code of Ethics.

 

Interactions with Healthcare Providers

 

Providing any benefits or advantages to HCPs in order to induce or encourage the use or referral of AVITA products is strictly prohibited by both U.S. and international laws and regulations. Restrictions under applicable Federal and State healthcare laws and regulations include but are not limited to the following:

 

 

The Federal healthcare Anti-Kickback Statute (“AKS”). AKS prohibits any person from soliciting, offering, receiving, or providing any remuneration in cash or in kind, whether directly or indirectly, to induce or reward the referral, purchase, lease, order, or recommendation of any item or service for which payment may be made in whole or in part under a federal healthcare program such as Medicare and Medicaid

 

 

The Federal False Claims Act (“FCA”). FCA may be enforced by either the U.S. Department of Justice or private whistleblowers should they choose to bring civil (qui tam) actions on behalf of the federal government. The FCA imposes civil penalties, as well as liability for treble damages and for attorneys’ fees and costs, on individuals or entities who knowingly present, or cause to be presented, claims for payment that are false or fraudulent to the federal government. FCA also imposes similar penalties on those who make a false statement material to a fraudulent claim, or who improperly avoid, decrease, or conceal an obligation to pay money to the federal government

 

 

State and foreign laws and regulations may apply to sales or marketing arrangements and claims involving healthcare devices or services reimbursed by non-governmental third-party payors

 

Additionally, certain state laws require medical device companies to comply with voluntary compliance guidelines promulgated by global trade associations and relevant compliance guidance issues by the U.S. Department of Health and Human Services, Office of Inspector General. Such laws prohibit medical device manufacturers from offering or providing certain types of payments or gifts to health care providers; and/or require the disclosure of gifts or payments to healthcare providers.

 

Interactions with Foreign Officials and Entities

 

The U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party, or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the U.S. to comply with accounting provisions requiring the companies to maintain books and records that accurately and fairly reflect all transactions of the companies, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. We are also subject to similar regulations under the Australian bribery laws and other anti-corruption laws that apply in countries where we do business.

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Federal and State Reporting

 

Pursuant to the federal Physician Payment Sunshine Act, AVITA is required to report annually to the Centers for Medicare and Medicaid Services within the U.S. Department of Health and Human Services, as well as in accordance with all relevant state marketing reporting regulations, any payments, and transfers of value to physicians and teaching hospitals, as well as other categories of disclosures.

 

Privacy

AVITA must comply with the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) which imposes criminal and civil liability for, among other conduct, making false statements relating to healthcare matters and executing a scheme to defraud any healthcare benefit program.  It also imposes criminal and civil liability and penalties on those who violate requirements such as mandatory contractual terms which are intended to safeguard the security, transmission and use of individually identifiable health information.

 

Various state and foreign laws also govern the privacy and security of health information such as the European Union General Data Protection Regulation (“GDPR”). GDPR governs the use of individual health data and other personal information and imposes strict obligations and restrictions on the ability to use, access, process, and disseminate health data from clinical trials and adverse event reporting, among others.

 

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

We are subject to extensive environmental, health and safety laws and regulations in a number of jurisdictions, primarily in California and the U.S., governing, among other things: the use, storage, registration, handling, emission and disposal of chemicals, waste materials and sewage; chemicals, air, water and ground contamination; and air emissions and the cleanup of contaminated sites, including any contamination that could result from spills due to our failure to properly dispose of production waste materials. Our operations at our Ventura manufacturing facility produce a small amount of waste materials that are considered minimally hazardous, and we use a third-party waste disposal company to remove any waste generated during operations from the facility. Our activities require permits from various governmental authorities including local municipal authorities. Local and state authorities may conduct periodic inspections in order to review and ensure our compliance with the various regulations. We are not presently aware of any violations or deficiencies. These laws, regulations and permits could potentially require the expenditure by us for compliance or remediation.

AVAILABLE INFORMATION

The Company files annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Exchange Act. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  The public can obtain any documents that we file with the SEC at www.sec.gov. In addition, copies of announcements made by the Company to ASX are available on the ASX website (www.asx.com.au) and also, under the heading “Investors: Press Releases” at the following link on our website (https://ir.avitamedical.com/press-releases).  We maintain a website at www.avitamedical.com. Since becoming a domestic U.S. issuer on July 1, 2020, our filings with the SEC, including without limitation, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge  on our website under the heading “Investors: Financials _SEC Filings” at the following link on our website (https://ir.avitamedical.com/financials/sec-filings), as soon as reasonably practicable after we file or furnish them electronically with the SEC.  Information contained on our website is not part of or incorporated into this report.

ORGANIZATIONAL STRUCTURE

The Company has a total of six subsidiaries and their corporate details and business activities are listed below:

 

Subsidiary Name

Place of
Incorporation

%
Held

Business Purpose

AVITA Medical Pty Limited

Australia

100

Operating Company

AVITA Medical Americas, LLC

Delaware

100

U.S. operations

AVITA Medical Europe Limited

United Kingdom

100

EMEA operations

Visiomed Group Pty Ltd

Australia

100

Asia Pacific Operations

C3 Operations Pty Ltd

Australia

100

Holding company

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Subsidiary Name

Place of
Incorporation

%
Held

Business Purpose

Infamed Pty Ltd

Australia

100

Inactive

 

Item 1A. RISK FACTORS

 

Our business faces significant risks. You should carefully consider all of the information set forth in this annual report, including the following risk factors. Our business, results of operations, and financial condition could be materially and adversely affected by any of these risks, and in such event, the trading price of our common stock would likely decline, and you might lose all or part of your investment. This Annual Report also contains forward-looking statements that involve risks and uncertainties, and our results could materially differ from those anticipated in these forward-looking statements. See “Forward-Looking Statements” included elsewhere within this Annual Report for a discussion of certain risks, uncertainties and assumptions associated with these statements.

 

Risks Related to Our Business Operations

 

We have experienced significant losses, expect losses to continue for the foreseeable future and may never achieve or maintain profitability.

 

Although we have begun full scale marketing and sales of our RECELL® System in the United States and other jurisdictions, such sales have been limited to date and we have not yet obtained profitability. We had a total net loss of $26.6 million, $42 million, and $25.1 million for our fiscal years ended June 30, 2021, 2020 and 2019, respectively. We have incurred a cumulative deficit of $221.5 million through June 30, 2021. We anticipate that we may continue to incur losses at least until U.S. sales of the RECELL System are adequate to fund operating expenses. We may not be able to successfully achieve or sustain profitability. Successful transition to profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure, including in new markets for which we are not presently approved.

 

We are dependent on our contract with the U.S. Biomedical Advanced Research and Development Authority (“BARDA”), and if we do not continue to receive funding under this contract, we may need to obtain alternative sources of funding.

 

We have a contract with BARDA valued currently at $53.4 million related to funding for the development of the RECELL System and future use of the product to assist disaster preparedness and response in the United States for mass casualties involving burn victims. As of June 30, 2021, we had received cumulative payments of $30.9 million under the BARDA contract. Under the contract BARDA has agreed to fund and provide technical support for the development of the RECELL System including two randomized, controlled pivotal clinical trials, Compassionate Use and Continued Access programs, development of the health economic model demonstrating the cost savings associated with the RECELL System, and a randomized, controlled clinical trial in pediatric scald patients. Also included in the BARDA contract is a provision for the future procurement of the RECELL System by BARDA under a vendor-managed inventory system to bolster disaster preparedness which BARDA initiated procurement for in July 2020. As of June 30, 2021, a total of 5,614 RECELL system units have been delivered into the VMI and accepted by BARDA. Any reduction or delay in BARDA funding may force us to seek alternative funding, which may not be available on non-dilutive terms, terms favorable to us or at all, or cease our development programs related to the BARDA contract.

 

Provisions in our U.S. government contracts, including our contracts with BARDA, may affect our intellectual property rights.

 

Certain of our activities have been funded, and may in the future be funded, by the U.S. government, including through our contracts with BARDA. When new technologies are developed with U.S. government funding, the government obtains certain rights in any resulting patents, including the right to a nonexclusive license authorizing the government to use the invention and rights that may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the U.S. government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, U.S. government-funded inventions must be reported to the government, U.S. government funding must be disclosed in any resulting patent applications, and our rights in such inventions may be subject to certain requirements to manufacture products in the United States.

 

 

Development and commercialization of our products require successful completion of the regulatory approval process and may suffer delays or fail. We may be unsuccessful in obtaining additional approvals for our RECELL System for the treatment of trauma injuries and skin conditions such as vitiligo

 

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In the United States, as well as other jurisdictions, we have been and will be required to apply for and receive regulatory authorization before we can market our products. Although our RECELL System has been approved for use in the treatment of acute partial-thickness thermal burn wounds in patients 18 years of age and older or application in combination with meshed autografting for acute full-thickness thermal burn wounds in pediatric and adult patients in the United States, we will have to apply for a supplement to our PMA approval to market the product for use in the treatment of trauma injuries and vitiligo. We plan to expand into each of these indications and will need to apply for a supplement to our PMA approval with the FDA in connection with each proposed additional indication. While clinical trials for such uses are presently underway or planned, there can be no assurance that we will be successful in those clinical trials or ever receive approval by the FDA for the use of our RECELL System for such additional applications. Such a failure of approval would have a material negative effect on our future prospects. In Australia, the RECELL System is approved to use for the treatment of burns, acute wounds, scars and repigmentation (vitiligo). In the EU the product has been approved for the treatment of burns, chronic wounds, scars, and vitiligo. We will require additional clinical data or approvals from regulatory authorities within these countries to market the product for the treatment of other indications, and from any other jurisdictions in which we seek to market the product. This process can be time consuming and complicated and may be unsuccessful or otherwise result in unanticipated delays or fail altogether. To secure marketing authorization, an applicant generally is required to submit an application that includes the data supporting preclinical and clinical safety and effectiveness as well as detailed information on the manufacturing and control of the product, proposed labeling and other additional information. Before marketing authorization is granted, regulatory authorities may require the inspection of the manufacturing facility or facilities and quality systems (including those of third parties) at which the product candidate is manufactured and tested, as well as potential audits of the non-clinical and clinical trial sites that generated the data cited in the marketing authorization application.

 

We cannot predict whether any additional marketing authorizations will ultimately be granted or how long the applicable regulatory authority or agency will take to do so. Regulatory agencies, including the FDA, have substantial discretion in the approval process. In addition, the approval process and the requirements governing clinical trials vary from country to country. The policies of the FDA or other regulatory authorities may change, and additional government regulations may be enacted that could prevent, limit or delay the necessary approval of any products we may develop and commercialize. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or elsewhere. If we are slow or unable to adapt to new or changed requirements, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, and we may not achieve or sustain profitability.

 

Additionally, any future regulatory approvals that we receive may also contain requirements for costly post-marketing testing and surveillance to monitor the safety and effectiveness of the product. Once a product is approved, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export, and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submission of safety and other post-marketing reports, registration, and continued compliance with good manufacturing practices for any clinical trials that we conduct post-approval.

 

Finally, per FDA regulations, changes made to products, specifications, or test data evaluation methodology would generally require communication with the FDA. There are several pathways for communicating with the FDA of such changes. As part of such review, the FDA may request additional information, at which time the product may become temporarily unavailable.

 

Obtaining and maintaining regulatory approval for a product candidate in one jurisdiction does not mean that we will be successful in obtaining regulatory approval for that product candidate in other jurisdictions.

 

Obtaining and maintaining regulatory approval for a product in one jurisdiction does not guarantee that we will be able to obtain or maintain similar approval in other jurisdictions, while a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. For example, even if the FDA grants marketing approval for use of our RECELL System for the treatment of pediatric burns, trauma injuries and/or vitiligo, comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries if not currently approved. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials as clinical trials conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a medical device must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.

 

 

We are highly dependent on our regulatory approval (“PMA”) in the United States and failure to maintain that approval would materially impact our business and prospects.

 

Our business is highly dependent on the PMA we received in September 2018 from the FDA. This PMA allows us to sell our RECELL System in the United States, our current primary market. In addition, maintaining this PMA also increases the probability of

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approval of secondary indications for the PMA outside of trauma burns. While we intend to take every action and precaution to ensure that our PMA remains effective, it is possible that the FDA could take a position in the future that requires a modification, temporary suspension or revocation of our PMA. Any such action by the FDA would have a material adverse effect on our business.

 

We may encounter substantial delays in any further clinical studies necessary to support any regulatory applications for additional commercial applications of our technology.

 

We cannot guarantee that any preclinical testing or clinical trials will be conducted as planned or completed on schedule, if at all. As a result, we may not achieve the expected clinical milestones necessary for approval by the FDA, or other regulators, for the use of our RECELL System for additional applications in the United States or other countries.

 

A failure in a clinical study or regulatory application can occur at any stage. Events that may prevent successful or timely

commencement, enrollment or completion of clinical development or a regulatory application include:

 

delays in raising, or inability to raise, sufficient capital to fund the planned trials;

 

delays in reaching a consensus with regulatory agencies on trial design;

 

changes in trial design;

 

inability to identify, recruit and train suitable clinical investigators;

 

inability to add new clinical trial sites;

 

delays in reaching agreement on acceptable terms for the performance of the trials with prospective clinical research organizations and clinical trial sites;

 

delays in recruiting suitable clinical sites and patients (i.e., subjects) to participate in clinical trials;

 

imposition of a clinical hold by regulatory agencies for any reason, including negative clinical results, safety concerns or as a result of an inspection of manufacturing or clinical operations or trial sites;

 

failure by any relevant parties to adhere to clinical trial requirements;

 

failure to perform in accordance with the FDA’s GCP, or applicable regulatory guidelines in other countries;

 

delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;

 

delays caused by clinical trial sites not completing a trial;

 

failure to demonstrate adequate effectiveness;

 

occurrence of serious adverse events in clinical trials that are associated with the product candidates that are viewed to outweigh its potential benefits;

 

changes in regulatory requirements and guidance that require amending or submitting new clinical protocols;

 

adverse events, safety issues, product recalls, manufacturing or supply chain interruptions, or poor clinical outcomes where the RECELL System is being used commercially; and

 

disagreements with regulatory agencies in the interpretation of the data from our clinical trials.

 

Delays, including delays caused by the above factors, can be costly and could negatively affect our ability to complete clinical trials for our product candidates. If we are not able to successfully complete clinical trials or are not able to do so in a timely and cost-effective manner, we will not be able to obtain regulatory approval for the use of our RECELL System for additional applications, all of which could have a material adverse effect on our business, financial condition and results of operations.

 

 

We may be unsuccessful in commercializing our RECELL System, or other future products, due to unfavorable pricing regulations or third-party coverage and reimbursement policies.

 

We cannot guarantee that we will receive favorable pricing and reimbursement for use of our products. The rules and regulations that govern pricing and reimbursement for medical products vary widely from country to country or from indication to indication, and within the United States, can also vary widely from one health system or hospital to the next. In some foreign jurisdictions, including the EU, the government largely controls pricing of medical products. In other countries, coverage negotiations must occur at the regional or hospital level. Pricing negotiations can take considerable time after the receipt of marketing approval for a medical product.

 

As a result, even after obtaining regulatory approval for a product in a particular country, we may be subject to price regulations or limited reimbursement, which may delay or limit our commercial launch of the product and negatively impact the revenue we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our total investment in our RECELL System or other future products, even after obtaining regulatory approval.

 

If we are unable to promptly obtain coverage and profitable payment rates from hospital budget, government-funded and private purchasers for the RECELL System or any future products, this could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.

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For example, we presently benefit from various reimbursement codes, including the following:

 

Medicare reimburses hospitals for inpatient services using MS-DRGs (Medicare Severity Diagnosis-Related Groups).

 

Specific ICD-10-PCS code series describing our “cell suspension technique” for the use of the RECELL System.

 

Current Procedural Terminology (“CPT”) for physicians to support reimbursement for physician rendered healthcare services.

 

There can be no guarantee that the above reimbursement codes will not be withdrawn, reduced, consolidated or otherwise be altered in a manner which is not supportive of ongoing commercial use of the RECELL System. In addition, we are also seeking a Transitional Pass-through Application (“TPT”) to support additional Medicare payment in the outpatient and the ambulatory surgical setting, and there can be no guarantee that the TPT will be approved, or we will be available in an amount or manner that supports our commercialization efforts.

 

We have limited financial resources and will likely require additional financings to continue the development and commercialization of our RECELL System or any future products, which may cause dilution to our existing stockholders or place restrictions on our operations. If additional financing is not available, we may have to postpone, reduce or cease operations.

 

If we are unable to achieve profitability sufficient to permit us to fund our operations and other planned actions, we may be required to raise additional capital. There can be no assurance that such capital would be available on favorable terms, or at all. If we raise additional capital through the issuance of equity or convertible debt securities, the percentage ownership held by existing stockholders may be reduced, and the market price of our common stock or CDIs could fall due to an increased number of shares or CDIs available for sale in the market. Debt financing, if available, may involve restrictive covenants, which may limit our operating flexibility with respect to certain business matters. If we are unable to secure additional capital as circumstances require, we may not be able to fund our planned activities or continue our operations.

 

 

We have limited experience in manufacturing our products in large-scale commercial quantities and we may face manufacturing risks that may adversely affect our ability to manufacture products and could reduce our gross margins and negatively affect our business and operating results.

 

Our success depends, in part, on our ability to manufacture our current and future products in sufficient quantities and on a timely basis to meet demand, while adhering to product quality standards, complying with regulatory quality system requirements and managing manufacturing costs. We have a manufacturing facility located in Ventura, California where we produce, package and warehouse the RECELL System. We also rely on global third-party manufacturers, Baxter International Inc., Hospira (a division of Pfizer), Thermo Fisher Scientific, Lyophilization Services of New England and Becton Dickinson and Company, for production of some of the components used in the RECELL System. If our facility, or the facilities of our third-party contract manufacturers, suffer damage, or a force majeure event, this could materially impact our ability to operate.

 

We are also subject to other risks relating to our manufacturing capabilities, including:

 

quality and reliability of components, sub-assemblies and materials that we source from third-party suppliers, who are required to meet our quality specifications, some of whom are our single-source suppliers for the products they supply;

 

failure to secure raw materials, components and materials in a timely manner, in sufficient quantities or on commercially reasonable terms;

 

inability to secure raw materials, components and materials of sufficient quality to meet the exacting needs of medical device manufacturing;

 

failure to maintain compliance with quality system requirements or pass regulatory quality inspections;

 

inability to increase production capacity or volumes to meet demand; and

 

inability to design or modify production processes to enable us to produce future products efficiently or implement changes in current products in response to design or regulatory requirements.

 

These risks could be exacerbated by our limited experience as an entity with large-scale commercial manufacturing. As demand for our products increases, we will have to invest additional resources to purchase raw materials and components, sub-assemblies and materials, hire and train employees and enhance our manufacturing processes. If we fail to increase our production capacity efficiently to meet demand for our products, we may not be able to fill customer orders on a timely basis, our sales may not increase in line with our expectations and our operating margins could fluctuate or decline. It may not be possible for us to manufacture our products at a cost or in quantities sufficient to make these products commercially viable or to maintain current operating margins, all of which could have a material adverse effect on our business, financial condition and results of operations. In addition, we are continually identifying additional third-party manufacturers who could serve if necessary, as replacement manufacturers should the need arise.

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We rely on third parties to conduct, supervise and monitor our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our drug product candidates and our business could be substantially harmed.

 

We rely on clinical research organizations (“CRO”), and clinical trial sites to ensure our clinical trials are conducted properly and on time. While we will have agreements governing their activities, we will have limited influence over their actual performance. CROs manage and monitor the clinical trials, duties and functions, and we will control only certain aspects of our CROs’ activities. Nevertheless, we will be responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities.

 

We and our CROs are required to comply with the FDA’s GCPs for conducting, recording and reporting the results of clinical trials to assure that the data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are protected. The FDA, and comparable foreign regulatory authorities, enforce these GCPs through periodic inspections of trial sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our future clinical trials may be deemed unreliable and the FDA or other foreign regulatory authorities may require us to perform additional clinical trials before approving any marketing applications.

 

 

If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our product candidates. If any such event were to occur, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenues could be delayed. If any of our relationships with these third-party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. Further, switching or adding additional CROs involves additional costs and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which could materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

 

As a result of COVID-19, other pandemics, or inadequate funding, the FDA and other government agencies may have resource constraints which could limit their ability to review and approve our applications in a timely manner, thus negatively impact our business.  

 

The FDA’s ability to review and approve regulatory submissions is impacted by staffing levels, funding levels and emergency priorities.  The time to review submissions can vary from time to time.   If a prolonged delay occurs in the review of any application from the Company, our business could be adversely impacted.  

 

Product recalls or inventory losses caused by unforeseen events may adversely affect our operating results and financial condition.

 

Our products are manufactured, stored and distributed using technically complex processes requiring specialized facilities, highly specific raw materials and other production constraints. The complexity of these processes, as well as strict company and government standards for the manufacture, storage and distribution of our product candidates, subjects us to risks. In addition, process deviations or unanticipated effects of approved process changes may result in production runs of our RECELL System not complying with stability requirements or specifications. The occurrence or suspected occurrence of production and distribution difficulties can lead to lost inventories and in some cases product recalls, with consequential reputational damage and the risk of product liability. The investigation and remediation of any identified problems can cause production delays, substantial expense, lost sales and delays of new product launches. In the event our production efforts require a recall or result in an inventory loss, our operating results and financial condition may be adversely affected.

 

 

 

A cyber security incident could be disruptive to our business, compromise confidential data, cause reputation harm, and subject us to litigation and federal and state governmental inquiries.  

 

We collect and store sensitive business and other information, including intellectual property and trade secrets, on our networks.  Our business operations are dependent upon the secure maintenance of this information.  Despite our efforts to secure this information, there can be no assurance that cyberattacks and other threats from malicious persons and groups will not cause harm to or

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disrupt our business and operations.  As a result, cyber security and the continued development and enhancement of our controls, processes and practices designed to protect our information systems from attack, damage or unauthorized access remain a priority for us.  We may be required to expend significant additional resources to protect against cyber threats.  A cyber attack may result in a material adverse effect on our financial position and results of operations and harm our business reputation.

 

We rely on information technology systems for critical business functions and the operations of our business.

 

We rely upon complex, integrated information technology (IT) systems in our business functions including our quality systems to operate our business.  If any of our IT systems were to be disrupted or fail, our business could suffer irreparable harm, financial loss, and our operations would be adversely impacted.  

 

The burn industry is subject to seasonal sales patterns and other variations which impact our revenue and operating cash flows.

 

In the past, the burn industry has been characterized by a high degree of seasonality.  Typically, relatively high levels of burn incidences have been realized in the summer months and low levels of burn incidences have been realized in the early winter months.  As a result, a significantly higher percentage of our annual revenues have historically been recognized in the third quarter and the lowest percentage of annual revenues in the first quarter of a given calendar year.  The seasonality of burn related cases, exacerbated by COVID-19 influences, impact our revenues, thus making it difficult accurately predict future revenues and may prevent us from achieving our quarterly or annual forecasts or meeting or exceeding the expectations of research analysts or investors, which in turn may cause our stock price to decline.

 

The markets in which we operate are highly competitive and innovative.  Our competitors may develop products that render our products less attractive or obsolete and our business may deteriorate.

 

The markets for our products are highly competitive and our competitors may develop products that may more effectively compete with our products, thus negatively impacting our sales, financial conditions and business prospects.  Our competitors may have significantly more financial and other resources to invest in product development.  We must continue to develop and market new products, or we risk our products becoming obsolete, in which case, our revenues may decline, and our business prospects may suffer.  

 

Product development is an expensive, uncertain and lengthy process.  

 

We have significant product development projects ongoing that, if successful, are intended to improve the ease and use of our device in our current burn indication as well as planned future indications in soft tissue reconstruction, vitiligo and otherwise.  The costs, timeline and ultimate success of these product development programs are subject to risk and uncertainty.  If the Company is not able to develop and obtain regulatory approval for these products in development in a timely fashion and within budget, our business prospects and financial condition may suffer.  

 

Compliance with environmental, health and safety requirements is costly and, if not achieved, could result in material financial fines and penalties, expensive lawsuits, cessation of business operations, and a material adverse impact on the business.  

 

Our manufacturing and other processes may involve the use of hazardous materials subject to federal, state, and local and foreign environmental requirements.  Under some environmental laws and regulations, we could be held responsible for costs at third-party sites that we have used for waste disposal, or for contamination at our past or present facilities.  Failure to comply with current environment laws, or future laws, could result in significant fines, penalties and expenses which could have an adverse impact on our financial condition.  

 

Our future targeted indications would require us to obtain a Biologics License Application (“BLA”) for cell and gene therapy approval by the FDA (as opposed to PMA approval for a device).  BLA’s are subject to greater FDA scrutiny, as well as significantly more time and expense than a PMA.  If we are unable to obtain FDA approval for future BLAs, our future financial condition, prospects and results would be adversely impacted.  

 

The FDA requires a BLA for future cell and other biologic therapy candidates.  The BLA is a request for permission to deliver or introduce a biologic product into interstate commerce in the U.S.  The FDA undertakes a detailed and rigorous review of BLA candidates including pre-approval inspections of manufacturing facilities as well as pre and post approval clinical trials.  If these commitments are not met, the FDA can withdraw the product from the market.  

 

We may be subject to civil and criminal penalties if the FDA determines that we have marketed or promoted our products for off-label usage.  

 

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We are prohibited from promoting our products for uses that are inconsistent with the uses that have been approved by the FDA - also known as “off-label” uses. More specifically, we may not make claims, in our promotion materials, website or otherwise, about the use of any RECELL products which are outside of their approved labeling and indications. If the FDA determines that our marketing activities constitute off-label promotion, the FDA could impose fines and penalties on the Company and our executives, withdraw or recall our approved product from the market, as well as limit our product from off-label usage.  

 

 

Risks Relating to our Industry and Intellectual Property

 

We face competition from the existing standard of care and any future potential changes in medical practice and technology and the possibility that our competitors may develop products, treatments or procedures that are similar, more advanced, safer or more effective than ours.

 

The medical device, biotechnology and pharmaceutical industries, specifically relating to the areas where we currently or intend to market our RECELL System, are intensely competitive and subject to significant changes due to technology and medical practice standards. We may face competition from any number of different sources with respect to any products we develop and commercialize.

 

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products, treatments or procedures that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than our RECELL System or any future products we develop. Many of our current or future competitors may have significantly greater financial resources and experience and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we may have. Mergers and acquisitions in the pharmaceutical, medical device, and biotechnology industries or wound care markets may result in increased concentration of resources among a smaller number of our competitors. Other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These companies compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

 

We could be subject to product liability lawsuits, which could result in costly and time-consuming litigation and significant liabilities.

 

The development of medical device products, such as our RECELL System, involves an inherent risk of product liability claims and associated financial liability and adverse publicity. Any products we may develop could be found to be harmful or to contain harmful substances and expose us to substantial liability and risk of litigation or may force us to discontinue production. We may be unable to obtain or maintain insurance on reasonable terms or otherwise protect ourselves against potential product liability claims that could impede or prevent further business development of any products we may create and commercialize. Furthermore, a product liability claim could damage our reputation, whether or not such claims are covered by insurance or have merit. A product liability claim against us or the withdrawal of a product from the market could have a material adverse effect on our business or financial condition. Furthermore, product liability lawsuits, regardless of their success, would likely be time consuming and expensive to resolve and would divert management’s time and attention, which could seriously harm our business.

 

If we are unable to effectively protect our intellectual property, we may not be able to operate our business and third parties may be able to use and profit from our technology, both of which would impair our ability to be competitive

 

Our success will be heavily dependent on our ability to obtain and maintain meaningful patent protection for our technologies and products throughout the world. Patent law relating to the scope of claims in the technology fields in which we will operate is still evolving. The amount of ongoing protection for our proprietary rights therefore is uncertain. We will rely on patents to protect a significant part of our intellectual property and to enhance our competitive position. However, our presently pending or future patent applications may be denied, and any patent previously issued to us or our subsidiaries may be challenged, invalidated, held unenforceable or circumvented. In particular, we filed a patent Term Extension application with the U.S. Patent and Trademark  Office requesting an extension of our commercial patent that covers the RECELL System, U.S. Patent No. 9,029,140. If the term extension is approved, the patent term will be extended to April 9, 2024.  Without such approval, our RECELL System patent will expire in 2022 which could prevent us from defending our patent in the event a competitor infringes on our RECELL System by producing the same type of product.  Furthermore, the patent protections we have been granted may not be broad enough to prevent competitors from producing products similar to ours. In addition, the laws of various foreign countries in which we may compete, such as China, may not protect our intellectual property to the same extent as do the laws of the United States. If we fail to obtain adequate patent protection for our proprietary technology, our ability to be commercially competitive will be materially impaired.

 

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In the ordinary course of business and as appropriate, we intend to apply for additional patents covering both our technologies and products, as we deem appropriate. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or developing competing products and technologies. In addition, because patent law is evolving in the life science industry, the patent positions of companies like ours are uncertain. As a result, the validity and enforceability of our patents cannot be predicted with certainty.

 

We may find it difficult to protect our intellectual property rights throughout the world.

 

Filing, prosecuting and defending patents on all of our technologies and products in every jurisdiction is expensive. Competitors could reverse engineer our technologies in jurisdictions where we have not obtained patent protection to develop their own products. These products may compete with our products and may not be covered by any patent claims or other intellectual property rights.

 

The laws of some countries do not protect intellectual property rights to the same extent as the laws of the United States and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. This lack of protection, particularly in relation to biotechnology, could make it difficult for us to stop the infringement of our patents. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert the efforts and attention of key personnel from other aspects of our business.

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use of, our technology.

 

If we choose to go to court to stop someone else from using the inventions claimed in our patents or our licensed patents, that individual or company has the right to ask the court to rule that these patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would distract our key personnel and consume time and other resources, even if we were successful in stopping the infringement of these patents. In addition, there is a risk that a court will decide that these patents are invalid or unenforceable and that we do not have the right to stop the other party from using the inventions or, even if the validity or enforceability of these patents is upheld, the court may refuse to stop the other party because the competitors’ activities do not infringe our rights.

 

If third parties make claims of intellectual property infringement against us, or otherwise seek to establish their intellectual property rights equal or superior to ours, we may have to spend time and money in response and potentially discontinue certain of our operations.

 

While we currently do not believe it to be the case, third parties may claim that we are employing their proprietary technology without authorization or that we are infringing on their patents. If such claims were made, we could incur substantial costs coupled with diversion of our management and key technical personnel in defending against these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief which could effectively halt our ability to further develop, commercialize and sell products. In the event of a successful claim of infringement, courts may order us to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products and have a material negative effect on our business.

 

Any suits filed against us by third parties alleging we infringe their intellectual property rights could harm our business and operating results as well as our reputation.

 

There is considerable patent and other intellectual property activity in the industry in which we operate. We may be unaware of intellectual property rights of others that may cover some or all of our technology. Additionally, notwithstanding our receipt of a patent, a third-party may nevertheless challenge the validity of one or more claims included in the patent, which may require significant expenditure of funds, as well as time and effort by key personnel, to defend our claims.  

 

Our current and future relationships with investigators, health care professionals, consultants, third-party payors, and customers will be subject to applicable healthcare regulatory laws, which could expose us to penalties.

 

Our business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations. These

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laws regulate the business or financial arrangements and relationships through which we conduct our operations, including how we research, market, sell and distribute our products for which we obtain marketing approval. Such laws include:

 

the federal Anti-Kickback Statute prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation; in addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;

 

the federal false claims laws including the civil False Claims Act, which can be enforced through civil whistleblower or qui tam actions, and civil monetary penalties laws, which impose criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented to the federal government, claims for payment that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or knowingly making, or causing to be made, a false statement to avoid, decrease or conceal an obligation to pay money to the federal government; in addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;

 

HIPAA imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or making false or fraudulent statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;

 

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act and its implementing regulations, also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information on health plans, health care clearing houses, and certain health care providers, known as covered entities, and their business associates, defined as independent contractors or agents of covered entities that create, receive or obtain protected health information in connection with providing a service for or on behalf of a covered entity as well as their covered subcontractors;

 

a number of federal, state and foreign laws, regulations, guidance and standards that impose requirements regarding the protection of health data that are applicable to or affect our operations;

 

the federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to payments or other "transfers of value" made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to the government ownership and investment interests held by the physicians described above and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding their relationships with physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists and certified nurse midwives during the previous year; and

 

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to our business practices, including but not limited to, research, distribution, sales, and marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws that require medical device companies to comply with the  industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; state laws that require medical device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers, marketing expenditures or drug pricing, as well as state and local laws that require the registration of sales representatives; and state and foreign laws governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

 

Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.

 

Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.

 

In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the Health Care Reform Law, was passed, which substantially changed the way health care is financed by both

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governmental and private insurers, and significantly impacts the U.S. healthcare industry. The Health Care Reform Law, among other things, (i) subjects biologic products to potential competition by lower-cost biosimilars, (ii) addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected, (iii) increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations, (iv) establishes annual fees and taxes on manufacturers of certain branded prescription drugs, and (v) promotes a new Medicare Part D coverage gap discount program.

 

In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, delayed for another two months the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, the President signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect. Additional state and federal healthcare reform measures may be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.

 

Macroeconomic and Social Risks

 

Our business, results of operations and financial condition may be adversely impacted by the COVID-19 pandemic.

 

The COVID-19 pandemic has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, and created significant disruption of the financial markets. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it is impacting our employees, product development, customers and supply chain. We are unable to predict the ultimate impact that the COVID-19 pandemic may have on our business, future results of operations, financial position or cash flows. The extent to which our operations may be impacted by the COVID-19 pandemic and recovery will depend largely on future developments, which are highly uncertain and cannot be accurately predicted.

We may experience additional operating costs due to increased challenges with our workforce (including as a result of illness, absenteeism or government orders), access to supplies, capital, and fundamental support services (such as shipping and transportation). Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting supply chain disruptions, economic recession or depression. Furthermore, the impacts of potential worsening of global economic conditions, inflation resulting from government interventions and stimulus, and continued disruptions to and volatility in the financial markets remain unknown.

 

The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this section, any of which could have a material adverse effect on us. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

 

Adverse changes in general economic conditions or uncertainty about future economic conditions, including economic uncertainty from the current pandemic, could adversely affect us.

 

We are subject to the risks arising from adverse changes in general economic market conditions, including the negative impact to the U.S. and global economy from the COVID-19 pandemic. Uncertainty about future economic conditions could negatively affect our current and prospective customers causing them to delay the purchase of our products. Poor economic conditions could harm our business, financial condition, operating results and cash flows.

 

The COVID-19 pandemic may significantly disrupt our workforce and internal operations.

 

The COVID-19 pandemic may significantly disrupt our workforce if a significant percentage of our employees are unable to work due to illness, quarantines, government actions, facility closures in response to the pandemic, fear of acquiring COVID-19 while performing essential business functions, or as a result of changes to unemployment insurance where unemployed workers can receive, in the short-term, benefits in excess of what would be offered for working for us. As part of our response to the pandemic, during the course of fiscal year 2021, we instituted remote work schedule for employees at the Valencia location, mandatory masks and gloves and social distancing for employees at the Ventura location and no outside visitors were allowed unless due to a scheduled or unscheduled audit or regulatory inspection, in which case such third parties were required to wear masks and gloves and maintain social distancing. While we believe these changes have adequately addressed our business needs, we cannot guarantee that we will be

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able to continue to adequately staff our operations when needed. We cannot predict the extent to which the COVID-19 pandemic may disrupt our workforce and internal operations.

 

We have taken certain precautions due to the COVID-19 pandemic that could negatively impact our business.

 

In response to the COVID-19 pandemic, we have taken measures intended to protect the health and well-being of our employees, customers, and communities, which could negatively impact our business. These measures include temporarily requiring all non-essential employees (personnel whose roles allow) to work remotely, restricting work-related travel except for direct onsite service to our customers, restricting non-essential visitors from entering our sites, increasing the frequency and extent of cleaning and disinfecting facilities, workstations, and equipment and developing social distancing plans. The health of our workforce, customers and communities is of primary concern and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and others. In addition, our management team has, and will likely continue to, spend significant time, attention and resources monitoring the COVID-19 pandemic and seeking to manage its effects on our business and workforce. The extent to which the pandemic and our precautionary measures may impact our business will depend on future developments, which are highly uncertain and cannot be predicted at this time.

 

 

Risks Relating to Our Common Stock and CDIs

 

We have never paid a dividend on our common stock and CDIs and do not intend to do so in the foreseeable future, and consequently, investors’ only opportunity to realize a return on their investment in the Company is through the appreciation in the price of our common stock and CDIs.

 

We do not anticipate paying cash dividends on our common stock and CDIs in the foreseeable future and intend to retain all earnings, if any, for our operations. If we decided to pay dividends at some future time, we may not have sufficient funds legally available to do so. Even if funds are legally available for distribution, we may be unable to pay any dividends to our stockholders because of limitations imposed by a lack of liquidity. Accordingly, our stockholders may have to sell some or all of their common stock or CDIs (as applicable) in order to generate cash flow from their investment. Our stockholders may not receive a gain on their investment when they sell their common stock or CDIs and may lose some or all of their investment. Any determination to pay dividends in the future on our common stock and CDIs will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, capital requirements, and other factors that our board of directors deems relevant.

 

As long as we remain subject to the rules of the ASX and of NASDAQ, we will be unable to access equity capital without shareholder approval if such equity capital sales would result in an equity issuance above regulatory thresholds and consequently, we may be unable to obtain financing sufficient to sustain our business if we are unsuccessful in soliciting requisite shareholder approvals.

 

Our ability to access equity capital is currently limited by ASX Listing Rule 7.1, which provides that a company must not, subject to specified exceptions, issue or agree to issue during any consecutive 12-month period any equity securities, or other securities with rights to conversion to equity, if the number of those securities in aggregate would exceed 15% of the number of ordinary securities on issue at the commencement of that 12-month period unless shareholder approval is obtained.

Our equity issuances will be limited by ASX Listing Rule 7.1 so long as we continue to be listed on the ASX and this constraint may prevent us from raising the full amount of equity capital needed for operations without prior shareholder approval.

 

In addition to ASX Listing Rule 7.1, we are also subject to NASDAQ Listing Rule 5635(d), commonly referred to as the NASDAQ 20% Rule, which requires shareholder approval of a transaction other than a public offering involving the sale, issuance, or potential issuance by a company of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock, or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the shares. While less restrictive than ASX Listing Rule 7.1, the operation of the NASDAQ 20% rule could limit our ability to raise capital through issuance of common stock or convertible securities without jeopardizing our listing status. If we were to violate the NASDAQ 20% rule, the Company would be subject to delisting from NASDAQ and share prices and trading volumes would likely suffer.

 

There has been relatively limited trading volume in the markets for our common stock and CDIs, and more active, liquid trading markets for such securities may never develop.

 

Trading in our common stock on NASDAQ and our CDIs on the ASX is often thin and susceptible to wide fluctuations in trading prices due to such limited trading volume and other factors, some of which may have little to do with our operations or business prospects. Limited liquidity in the trading markets for our common stock and CDIs may adversely affect a stockholder’s

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ability to sell its shares of our common stock or our CDIs at the time it wishes to sell them or at a price that it considers acceptable. In addition, if a more active, liquid public trading market does not develop we may be limited in our ability to raise capital by selling shares of common stock or CDIs. We cannot assure you that more active, liquid public trading markets for our common stock and CDIs will develop or, if developed, will be sustained.

 

The market price and trading volume of our common stock and CDIs may be volatile and may be affected by variability in our performance from period to period and economic conditions beyond management’s control.

 

The market price of our common stock (including common stock represented by CDIs) may be highly volatile and could be subject to wide fluctuations. This means that our stockholders could experience a decrease in the value of their common stock or CDIs regardless of our operating performance or prospects. The market prices of securities of companies operating in the medical device and biotech sectors have often experienced fluctuations that have been unrelated or disproportionate to the operating results of these companies. In addition, the trading volume of our common stock and CDIs may fluctuate and cause significant price variations to occur. If the market price of our common stock or CDIs declines significantly, our stockholders may be unable to resell our common stock or CDIs at or above their purchase price, if at all. There can be no assurance that the market price of our common stock and CDIs will not fluctuate or significantly decline in the future.

 

Some specific factors that could negatively affect the price of our common stock and CDIs or result in fluctuations in their price and trading volume include:

 

actual or expected fluctuations in our operating results;

 

actual or expected changes in our growth rates or our competitors’ growth rates;

 

results of clinical trials of our product candidates;

 

results of clinical trials of our competitors’ products;

 

regulatory actions with respect to our products or our competitors’ products;

 

reports of one or more patient serious adverse events;

 

publication of research reports by securities analysts about us or our competitors in the industry;

 

our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;

 

fluctuations of exchange rates between the U.S. dollar and the Australian dollar;

 

issuances by us of debt or equity securities;

 

litigation involving our company, including shareholder litigation;

 

investigations or audits by regulators into the operations of our company;

 

proceedings initiated by our competitors or clients;

 

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

sales or perceived potential sales of the common stock or CDIs by us, our directors, senior management or our stockholders in the future;

 

short selling or other market manipulation activities;

 

announcement or expectation of additional financing efforts;

 

terrorist acts, acts of war or periods of widespread civil unrest;

 

economic and social effects of the COVID-19 virus or other pandemics;

 

natural disasters and other calamities;

 

changes in market conditions for biopharmaceutical stocks;

 

our inability to raise additional capital, limiting our ability to continue as a going concern;

 

changes in market prices for our product or for our raw materials;

 

 

changes in market valuations of similar companies;

 

changes in key personnel for us or our competitors;

 

speculation in the press or investment community;

 

changes or proposed changes in laws and regulations affecting our industry; and

 

conditions in the financial markets in general or changes in general economic conditions.

 

The requirements of being a public company in the United States may strain our resources and divert management’s attention.

 

As a public company, we are subject to the reporting requirements of the Exchange Act, the U.S. Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) the Dodd-Frank Act and the listing standards and the rules and regulations of NASDAQ. We are also subject to the reporting requirements under the ASX Listing Rules due to the listing of our CDIs on ASX. We expect that the requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources. As a result of our disclosure of information in filings required of a public company, our business and financial condition will become more visible,

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which may result in threatened or actual litigation, including by competitors, stockholders or third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.

 

We are an emerging growth company, and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions and relief from various U.S. reporting requirements that are applicable to other public companies that are not emerging growth companies, including (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) having the option of delaying the adoption of certain new or revised financial accounting standards, (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (iv) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have taken, and in the future may take, advantage of these exemptions until such time that we are no longer an emerging growth company. Accordingly, the information contained herein and in other reports we file with the SEC may be different than the information our investors receive from other public companies in which they hold stock. Further, we have elected to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards. It is possible that some investors will find our common stock and CDIs less attractive as a result, which may result in a less active trading market for our common stock and CDIs and higher volatility in our stock and CDI price.

 

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the U.S. Securities Act of 1933, as amended (the “Securities Act”), (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

 

 

If research analysts publish unfavorable commentary or downgrade our common stock or CDIs it could adversely affect our share price and trading volume.

 

The trading market for our common stock and CDIs depends, in part, on the research and reports that research analysts publish about us and our business and industry. If one or more research analysts downgrade our shares or CDIs, publish unfavorable commentary about the Company or cease publishing reports about us or our business, the price of our common stock and CDIs could decline. If one or more of the research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our common stock and CDIs could decrease, which could cause our share price or trading volume to decline.

 

General Risk Factors

 

If we fail to manage our growth effectively, our business could be disrupted.

 

Our future financial performance and ability to successfully commercialize our products, which is not guaranteed, and to compete in the market will depend, in part, on our ability to manage any future growth effectively. We expect to make significant investments to facilitate our future growth through, among other things:

 

new product development;

 

clinical development of our RECELL System to such areas trauma injuries and vitiligo;

 

clinical trials for additional indications; and

 

funding of our marketing and sales infrastructure.

 

Any failure to manage future growth effectively could have a material adverse effect on our business and results of operations.

 

Our growth and success depend on our ability to attract and retain additional highly qualified and skilled sales and marketing, research and development, operational, managerial and finance personnel.

 

Competition for skilled personnel is intense and the unexpected loss of an employee with a particular skill could have a material adverse effect on our operations until a replacement can be found and trained. If we cannot attract and retain skilled scientific

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and operational personnel for our research and development and manufacturing operations on acceptable terms, we may not be able to develop and commercialize our products. Further, any failure to effectively integrate new personnel could prevent us from successfully growing our company.

 

Our operations are subject to anti-corruption laws, including Australian bribery laws, and the FCPA and other anti-corruption laws that apply in countries where we do business.

 

Anti-corruption laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under these anti-corruption laws. In addition, we cannot predict the nature, scope, or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.

 

There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws or other laws including trade related laws. If we are not in compliance with these laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity.

 

Likewise, any investigation of any potential violations of these laws by respective government bodies could also have an adverse impact on our reputation, our business, results of operations and financial condition.

 

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Item 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

Item 2. PROPERTIES

 

Our principal corporate office is located at 28159 Avenue Stanford, Suite 220, Valencia, California 91355. We lease the 17,500 square foot facility under on lease agreement that, as amended, expires on July 31, 2022. Our production plant in Ventura, California, is a 27,480 square foot facility that we lease through September 30, 2024 with the right to extend the lease, at our sole option, as a result of two, three-year, options that allow us to extend the lease up to an additional six years in total. We do not own any real property. We believe that leased facilities are adequate to meet current needs and that additional facilities will, if required, be available for lease to meet future needs.

 

 

We are not currently involved in any significant legal, arbitration or governmental proceedings. From time to time, as an operating business, we are involved in disputes (both formal and informal) with customer, manufacturing partners and employees.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

AVITA Medical, the former parent company of the AVITA Group, began as a laboratory spin-off in the Australian State of Western Australia. AVITA Medical was formed under the laws of the Commonwealth of Australia in December 1992 and has operated as AVITA Medical since 2008. AVITA Medical’s ordinary shares originally began trading in Australia on the ASX on August 9, 1993. AVITA Medical’s ADSs traded over the counter on the OTCQX under the ticker symbol “AVMXY” from May 14, 2012 through September 30, 2019 and its ADSs began trading on the NASDAQ on October 1, 2019, under the ticker symbol “RCEL”.

 

Since completion of the Redomiciliation on June 29, 2020, the Company’s common stock has been quoted on NASDAQ under the ticker symbol “RCEL” and the Company’s CDIs have been quoted on the ASX under the ticker code “AVH”. One share of common stock on NASDAQ is equivalent to five CDIs on the ASX.

 

Holders

 

As of July 31, 2021, the Company had approximately 26,473 unique stockholders of record of our common stock (which includes CHESS Depositary Nominees Pty Ltd, who holds all of the outstanding common stock underlying the CDIs of the Company).

 

Dividends

 

We have never paid cash dividends to our stockholders or, prior to the Redomiciliation, to the holders of ordinary shares in AVITA Medical. We intend to retain future earnings for use in our business and do not anticipate paying cash dividends on our common stock and CDIs in the foreseeable future. Any future dividend policy will be determined by our board of directors and will be based upon various factors, including our results of operations, financial condition, current and anticipated cash needs, future prospects, contractual restrictions and other factors as our board of directors may deem relevant.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

On March 1, 2021, the Company issued 3,214,250 shares of common stock at the offering price of $21.50 per share. The gross proceeds from the offering are approximately $69.1 million. The Company incurred $5.1 million in capital issuance expenses. The offering was made pursuant to a shelf registration statement on Form S-3 (File No. 333-249419) that was previously filed with the SEC on October 9, 2020 and declared effective on October 16, 2020 and that was also publicly released on the ASX (the “Registration Statement”). The final prospectus supplement relating to and describing the terms of the offering was filed with the SEC on February 25, 2021 (in the United States) and released on the ASX on March 1, 2021 (in Australia).  There has been no material change in the planned use of proceeds from this offering as described in the Registration Statement. We invested the funds in short-term, interest-bearing investment-grade securities and government securities. As of June 30, 2021, we have not used any of the net proceeds from the offering. None of the offering proceeds were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10.0% or more of any class of our equity securities or to any other affiliates.

 

During the year ended June 30, 2020, we completed an institutional placement to raise $81.7 million (through our former parent company, AVITA Medical). We sold the equivalent of 2,033,898 shares at an issue price of $40.17 per share for total net proceeds of $76.6 million, after deducting commission and offering expenses. In addition, an aggregate of the equivalent of 15,853 shares were issued to our directors in lieu of their director fees during the year ended June 30, 2020 under the Director Share Plan that was approved by shareholders in December 2017. Each transaction was exempt from the registration requirements of the Securities Act as a transaction not involving a public offering pursuant to Section 4(2) of the Securities Act.

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Item 6. SELECTED FINANCIAL DATA

 

 

 

Year Ended June 30,

 

(In thousands, except share and per share data)

 

2021

 

 

2020

 

 

2019

 

Revenues

 

$

29,232

 

 

$

14,263

 

 

$

5,474

 

Cost of sales

 

 

(5,949

)

 

 

(2,973

)

 

 

(1,271

)

Gross profit

 

 

23,283

 

 

 

11,290

 

 

 

4,203

 

BARDA income

 

 

2,055

 

 

 

3,926

 

 

 

5,921

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses (1)

 

 

(14,660

)

 

 

(15,706

)

 

 

(12,549

)

General and administrative expenses (1)

 

 

(22,400

)

 

 

(33,025

)

 

 

(15,099

)

Research and development expenses (1)

 

 

(14,818

)

 

 

(9,164

)

 

 

(8,004

)

Total operating expenses

 

 

(51,878

)

 

 

(57,895

)

 

 

(35,652

)

Operating loss

 

 

(26,540

)

 

 

(42,679

)

 

 

(25,528

)

Interest expense

 

 

(22

)

 

 

(33

)

 

 

(27

)

Other income

 

 

17

 

 

 

686

 

 

 

332

 

Loss before income taxes

 

 

(26,545

)

 

 

(42,026

)

 

 

(25,223

)

Income tax benefit/(expense)

 

 

(38

)

 

 

(4

)

 

 

121

 

Net loss

 

$

(26,583

)

 

$

(42,030

)

 

$

(25,102

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.17

)

 

$

(2.07

)

 

$

(1.56

)

Diluted

 

$

(1.17

)

 

$

(2.07

)

 

$

(1.56

)

Weighted-average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,674,313

 

 

 

20,290,966

 

 

 

16,064,588

 

Diluted

 

 

22,674,313

 

 

 

20,290,966

 

 

 

16,064,588

 

 

 

(1)

Refer to Note 2 for information about a reclassification of share-based compensation expense for the 2020 and 2019 comparative period.

 

 

 

Year Ended June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

110,746

 

 

$

73,639

 

Total current assets

 

 

121,330

 

 

 

78,387

 

Total assets

 

 

125,501

 

 

 

82,462

 

Total current liabilities

 

 

7,390

 

 

 

7,709

 

Total long-term liabilities

 

 

2,456

 

 

 

2,352

 

Total Equity

 

 

115,655

 

 

 

72,401

 

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the years ended June 30, 2021 and 2020, should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report.

Results of Operations

The table below summarizes the results of our continuing operations for each of the periods presented (in thousands).

 

 

 

Year Ended June 30,

 

 

$

 

 

%

 

Statement of Operations Data:

 

2021

 

 

2020

 

 

Change

 

 

Change

 

Revenues

 

$

29,232

 

 

$

14,263

 

 

$

14,969

 

 

 

105

%

Cost of sales

 

 

(5,949

)

 

 

(2,973

)

 

 

(2,976

)

 

 

100

%

Gross profit

 

 

23,283

 

 

 

11,290

 

 

 

11,993

 

 

 

106

%

BARDA income

 

 

2,055

 

 

 

3,926

 

 

 

(1,871

)

 

 

(48

)%

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

(14,660

)

 

 

(15,706

)

 

 

1,046

 

 

 

(7

)%

General and administrative expenses

 

 

(22,400

)

 

 

(33,025

)

 

 

10,625

 

 

 

(32

)%

Research and development expenses

 

 

(14,818

)

 

 

(9,164

)

 

 

(5,654

)

 

 

62

%

Total operating expenses

 

 

(51,878

)

 

 

(57,895

)

 

 

6,017

 

 

 

(10

)%

Operating loss

 

 

(26,540

)

 

 

(42,679

)

 

 

16,139

 

 

 

(38

)%

Interest expense

 

 

(22

)

 

 

(33

)

 

 

11

 

 

 

(33

)%

Other income

 

 

17

 

 

 

686

 

 

 

(669

)

 

 

(98

)%

Loss before income taxes

 

 

(26,545

)

 

 

(42,026

)

 

 

15,481

 

 

 

(37

)%

Income tax benefit (expense)

 

 

(38

)

 

 

(4

)

 

 

(34

)

 

 

850

%

Net loss

 

$

(26,583

)

 

$

(42,030

)

 

$

15,447

 

 

 

(37

)%

 

Year Ended June 30, 2021, compared to Year Ended June 30, 2020

Total net revenue increased 105% to $29.2 million, compared to $14.3 million in the corresponding period in the prior year.  RECELL® commercial revenues were $21.5 million, while RECELL revenues associated U.S. Department of Health and Human Services’ Biomedical Advanced Research and Development Authority within the Office of the Assistant Secretary for Preparedness and Response (“BARDA”) were $7.7 million.  Revenues associated with BARDA were attributable to the purchase of RECELL units for emergency preparedness by BARDA.  RECELL commercial revenues, increased 50% or $7.2 million.

Gross profit margin was 80% compared with 79% in the same period in the prior year, driven largely by lower shipping costs and increased production along with the extension of our shelf-life.  

BARDA income consisted of funding from BARDA, under the Assistant Secretary for Preparedness and Response, within the U.S. Department of Health and Human Services, under ongoing USG Contract No. HHSO100201500028C. Under the BARDA contract, income of $2.1 million was recognized during the year ended June 30, 2021, compared to income of $3.9 million for the year ended June 30, 2020. BARDA income declined as a result of wind-down of certain activities associated with supporting the U.S. FDA approval of the RECEL System as well as the compassionate use, continued access programs and pivotal trials for the treatment of pediatric scald injuries.

Total operating expenses decreased 10% or $6 million to $51.9 million, compared with $57.9 million incurred in the same period in the prior year. Sales and marketing expenses decreased $1 million or 7% to $14.7 million, compared to $15.7 million recognized in the same period in the prior year. The decrease in sales and marketing expenses is primarily due to fewer conferences, lower travel expenses due to COVID-19 related travel restrictions and higher costs incurred in the prior year associated with the product launch. General and administrative expenses decreased 32% or $10.6 million to $22.4 million compared with $33 million recognized in the same period in the prior year. The decrease was driven by higher share-based compensation expenses in the prior year associated with certain performance milestones being met along with higher costs related to the Redomiciliation. Research and development expenses increased 61% or $5.6 million to $14.8 million, compared to $9.2 million recognized in the same period in the prior year. The increase was primarily attributed to ramping up of clinical trials related activities for treatment of vitiligo as well as other research and development costs associated with furthering the Company’s pipeline.

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Net loss after tax decreased 37% or $15.4 million to $26.6 million, over the $42 million recognized in the same period in the prior year. The decrease in net loss was driven by higher revenue during the year, and lower operating expenses described above.

The table below summarizes the results of our continuing operations for each of the periods presented (in thousands).

 

 

 

Year Ended June 30,

 

 

$

 

 

%

 

Statement of Operations Data:

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Revenues

 

$

14,263

 

 

$

5,474

 

 

$

8,789

 

 

 

161

%

Cost of sales

 

 

(2,973

)

 

 

(1,271

)

 

 

(1,702

)

 

 

134

%

Gross profit

 

 

11,290

 

 

 

4,203

 

 

 

7,087

 

 

 

169

%

BARDA income

 

 

3,926

 

 

 

5,921

 

 

 

(1,995

)

 

 

(34

)%

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

(15,706

)

 

 

(12,549

)

 

 

(3,157

)

 

 

25

%

General and administrative expenses

 

 

(33,025

)

 

 

(15,099

)

 

 

(17,926

)

 

 

119

%

Research and development expenses

 

 

(9,164

)

 

 

(8,004

)

 

 

(1,160

)

 

 

14

%

Total operating expenses

 

 

(57,895

)

 

 

(35,652

)

 

 

(22,243

)

 

 

62

%

Operating loss

 

 

(42,679

)

 

 

(25,528

)

 

 

(17,151

)

 

 

67

%

Interest expense

 

 

(33

)

 

 

(27

)

 

 

(6

)

 

 

22

%

Other income

 

 

686

 

 

 

332

 

 

 

354

 

 

 

107

%

Loss before income taxes

 

 

(42,026

)

 

 

(25,223

)

 

 

(16,803

)

 

 

67

%

Income tax benefit (expense)

 

 

(4

)

 

 

121

 

 

 

(125

)

 

 

(103

)%

Net loss

 

$

(42,030

)

 

$

(25,102

)

 

$

(16,928

)

 

 

67

%

 

Year Ended June 30, 2020, compared to Year Ended June 30, 2019

Total net revenue increased 161% to $14.3 million, compared to $5.5 million. Similar to prior years, most of the current year increase in sales occurred in the United States as a result of the September 2018 FDA approval and commencement of the U.S. national market launch of the RECELL System in January 2019. U.S. sales during the year ended June 30, 2020, totaled $13.8 million compared to $4.4 million in the prior year.  

Gross profit margin was 79% compared to 77% for the same period in 2019 driven largely by increased production.

BARDA income consisted of funding from BARDA, under the Assistant Secretary for Preparedness and Response, within the U.S. Department of Health and Human Services, under ongoing USG Contract No. HHSO100201500028C. Under the BARDA contract, income of $3.9 million was recognized during the year ended June 30, 2020, compared to income of $5.9 million for the year ended June 30, 2019. BARDA income declined as a result of wind-down of certain activities associated with supporting the U.S. FDA approval of the RECEL System as well as the compassionate use and continued access programs.

Total operating expenses increased 62% or $22.2 million to $57.9 million, compared to $35.7 million incurred in the same period in the prior year. Sales and marketing expenses increased 25% or $3.2 million to $15.7 million, compared to $12.6 million recognized in the same period in the prior year. This increase was primarily attributed to commercialization activities being provided for the entire fiscal year ended June 30, 2020, versus the prior fiscal year where those activities were rendered for less than twelve months. General and administrative expenses increased 119% or $17.9 million to $33 million compared to $15.1 million recognized in the same period in the prior year. The increase was primarily a result of higher share-based compensation and higher costs related to the Redomiciliation together with additional headcount associated with the growth of the Company and the Company’s status as a cross listed entity on NASDAQ and the ASX. Share-based compensation increased $14.6 million primarily due to the increase in the grant date fair value of awards granted during the year due to higher stock prices and accelerated expense due to meeting of certain performance milestones. Research and development expenses increased 14% or $1.2 million to $9.2 million compared to $8.0 million recognized during the same period in the prior year

Net loss after tax increased 67% or $16.9 million to $42 million compared to $25.1 million in the same period in the prior year. The increase in net loss was driven by the higher operating expenses described above, partially offset by the higher revenue during the year. As a result of the U.S. national launch of the RECELL System in January 2019, and the expansion of research and development including multiple pivotal clinical studies seeking premarket approval from the FDA, operating expenses are expected to increase in future periods. These expenses are expected to be partially offset by increased commercial sales of the RECELL System as well as income under the BARDA contract.

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B. Liquidity and Capital Resources

We expect to utilize cash reserves until U.S. sales of our products reach a level sufficient to fund ongoing operations. The AVITA Group has historically funded its research and development activities, and more recently its substantial investment in sales and marketing activities, through raising capital by issuing securities, and it is expected that similar funding will be obtained to provide working capital if and when required. If the Company is unable to raise capital in the future, the Company may need to curtail expenditures by scaling back certain research and development or other programs.

On March 1, 2021, the Company issued 3,214,250 shares of common stock at the offering price of $21.50 per share. The gross proceeds from the offering are approximately $69.1 million. The Company incurred $5.1 million in capital issuance expenses. The offering was made pursuant to a shelf registration statement on Form S-3 (File No. 333-249419) that was previously filed with the SEC on October 9, 2020 and declared effective on October 16, 2020 and that was also publicly released on the ASX. The final prospectus supplement relating to and describing the terms of the offering was filed with the SEC on February 25, 2021 (in the United States) and released on the ASX on March 1, 2021 (in Australia).

During the year ended June 30, 2020, we raised additional capital via a private placement in the amount of $81.7 million (through our former parent company, AVITA Medical). We sold the equivalent of 2,033,898 shares at an issue price of $40.17 per share for total net proceeds of $76.6 million, after deducting commission and offering expenses.

During the year ended June 30, 2019, we completed a series of equity transactions (through our former parent company, AVITA Medical). The second tranche of the June 2018 Placement (defined below) closed on July 27, 2018, raising an aggregate of $2.4 million through the issuance of the equivalent of 650,000 shares in the Company at $3.70 per share. During December 2018, we completed a placement to raise $28.8 million over two tranches. We completed the first tranche on December 10, 2018 and issued the equivalent of 3,100,471 shares in the Company at a price of $5.76 per share raising gross proceeds of $17.9 million. The settlement of the second tranche for $10.9 million was approved by the shareholders at an extraordinary meeting held during January 2019. The second tranche closed on January 18, 2019 and raised gross proceeds of $10.9 million through the sale of the equivalent of 1,899,530 shares in the Company at the same price as the first tranche, being $5.76 per share. In addition, on January 10, 2019, we completed a Share Purchase Plan under which we effectively offered existing eligible shareholders the opportunity to purchase shares in the Company at a purchase price of $5.74 per share. As part of the Share Purchase Plan, we received gross proceeds of $1.3 million for the issuance of the equivalent of 220,612 shares in the Company.

The AVITA Group also benefits from cash inflows from the BARDA contract, awarded to the AVITA Group in September 2015 and subsequently expanded through a series of modifications. These payments from BARDA offset operating costs from various activities undertaken to support the FDA regulatory approval process for RECELL in the United States, preparation for the planned commercial launch of RECELL in the United States, and RECELL clinical programs in the United States. Further, there were no material expenditure commitments from the BARDA contract. With the U.S. FDA approval of RECELL for the treatment of burns in September 2018, and the U.S. market launch of the product in January 2019, sales of goods are expected to be an increasing source of revenue in the future. On July 13, 2020, the Company announced that BARDA will procure the RECELL System and agreed to the purchase, storage and delivery of RECELL Systems utilizing a vendor-managed inventory (“VMI”) plan valued at $7.6 million. Further, BARDA has expanded the awarded contract to provide supplemental funding of $1.6 million to support emergency deployment of RECELL Systems for use in mass casualty or other emergency situations. Delivery of RECELL system under the VMI plan commenced in the third quarter of fiscal year 2021 and as of year-end a total of 5,614 RECELL system units have been delivered into the VMI and accepted by BARDA.  As of June 30, 2021, we had received cumulative payments of $30.9 million under the BARDA contract.  For the year ended June 30, 2021, we have recognized $7.6 million of revenue related to the sale of the RECELL system to BARDA and $154,000 related to services provided to BARDA for emergency preparedness.

Given the above, we believe there is presently sufficient working capital to support our committed research and development programs and other activities over the next twelve months and the Company believes it has the ability to realize its assets and pay its liabilities and commitments in the normal course of business.

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The following table summarizes our cash flows for the periods presented:

 

 

 

Years Ended June 30,

 

(In Thousands)

 

2021

 

 

2020

 

 

2019

 

Net cash used in operations

 

$

(25,901

)

 

$

(22,747

)

 

$

(19,250

)

Net cash used in investing activities

 

 

(1,174

)

 

 

(847

)

 

 

(1,227

)

Net cash provided by financing activities

 

 

64,049

 

 

 

77,057

 

 

 

29,709

 

Effect of foreign exchange rate on cash and restricted cash

 

 

133

 

 

 

3

 

 

 

156

 

Net increase in cash and restricted cash

 

 

37,107

 

 

 

53,466

 

 

 

9,388

 

Cash and restricted cash at beginning of year

 

 

73,840

 

 

 

20,374

 

 

 

10,986

 

Cash and restricted cash at end of year

 

 

110,947

 

 

 

73,840

 

 

 

20,374

 

 

Years Ended June 30, 2021, and 2020

Net cash used in operating activities was $25.9 million and $22.7 million during the years ended June 30, 2021, and 2020, respectively. The increase was primarily due to higher BARDA receivables attributable from the purchase of RECELL units by BARDA.

Net cash used in investing activities was $1.2 million and $0.8 million during the years ended June 30, 2021, and 2020, respectively. Cash flows used for investing activities was primarily attributable to payments for the purchase of a property and equipment.

Net cash provided by financing activities was $64 million and $77.1 million for the years ended June 30, 2021, and 2020, respectively. The AVITA Group completed a series of financing transactions during the year ended June 30, 2021, and 2020 and received proceeds from the issuance of shares and exercise of options.

Capital management

We aim to manage capita